addressing non-compliance

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Most Canadians understand the importance of responsible citizenship and the connection between a sustainable tax system and our quality of life.

In 2011-2012:

• 94% of individuals paid their reported taxes on time.
• 91% of individuals filed their tax return on time.
• 90% of corporations paid their reported taxes on time.
• 85% of corporations with taxable income filed their tax return on time. Footnote 1
• 94% of businesses were registered for the GST/HST. Footnote 2

The CRA takes non-compliance very seriously. While most taxpayers meet their obligations, a small percentage do not comply. Some instances of non-compliance are a result of error or misunderstanding. For these situations, we rely on our systems to identify and correct the tax return. We employ a graduated approach of interventions to ensure that non-compliance is addressed as early as possible with the least intrusive involvement. Our risk assessment tools help us select the most effective strategy.

For more complex issues, files are referred to auditors and specialists for review, which sometimes results in a full‑scale audit.

spending profile

Specialized program areas also use their advanced knowledge and expertise to identify instances where there is a high risk of non-compliance, and conduct audits of the highest-risk cases. This graduated approach to addressing non-compliance results in the most cost-effective and efficient intervention and imposes the least burden on the taxpayer. Our activities to address non‑compliance include:

• early intervention
• complex intervention
• enforcement
• payment of tax debt

Our goal is to ensure that identified non‑compliance is addressed. To achieve this goal, we focus a great deal of our effort on early detection and intervention. If we can address non-compliance before the behaviour escalates or becomes habitual, we can reduce the need for more aggressive and complex enforcement actions.

early intervention

Information technology, business intelligence, and our risk assessment systems are the cornerstone of our early intervention approach.

In 2011-2012, we processed approximately:

• 27 million individual and trust returns;
• 2 million corporate returns; and
• 7.5 million GST/HST returns.

All tax returns go through an extensive set of system validations for error detection and correction. This allows us to identify certain discrepancies in amounts, deductions, and credits that taxpayers reported on their tax return. We correct errors and omissions through an automated process and send a notice of assessment to the taxpayer explaining the results.

In addition, we use risk assessment models to identify tax returns for further review. We have four major early intervention processing review programs: confidence validity, processing review, individual matching, and the corporate assessing review program.

This early intervention review identified over $1 billion of non-compliance in 2011-2012, similar to the dollar value identified last year.

The common areas of misunderstanding that we identify in this initial review process are analyzed to detect trends or gaps in services. Where appropriate, this information is entered into our risk assessment systems to help us identify files for more in-depth review.

confidence validity

Our confidence validity program identifies and corrects errors and inadmissible claims on individuals' returns before finalizing a notice of assessment.

• In 2011-2012, we identified an average of $445 per return in additional taxes assessed, for a total of $156 million.

processing review

After the notice of assessment for individual income tax is issued, our processing review program selects files that have been identified through our risk-scoring process for more in-depth review of specific elements like tax credits. We then ask taxpayers for more information to verify their claims.

• In 2011-2012, we identified $213 million in federal, provincial, and territorial taxes through processing review.

matching

This step in our review process compares information we have from third parties with the tax returns that individuals filed. We correct information that is not accurate or complete in the original return.

• In 2011-2012, the matching program generated $665 million in additional individual tax assessments.

corporate assessing review

This program validates and reviews corporate income tax returns to make sure that assessments are accurate. Since the reviews are conducted soon after the initial assessments are carried out, we find and correct errors early. This process minimizes the risk of paying penalties and interest.

This past year we reviewed 68,222 returns, an increase of 41% from last year, and identified $51.8 million in additional tax. Our reviews also resulted in adjustments of $273.8 million to corporate loss pool balances reported on corporation income tax returns.

complex intervention

When more serious discrepancies are identified, either through referrals from our early intervention programs or risk assessment within specialized program areas, we refer files to the appropriate centres of expertise for a more intensive review. Business analytics and risk models help to determine the level of intervention needed.

Each of the following represents one of the CRA's more intensive compliance interventions.

source deductions

Employers are responsible for withholding, remitting, and reporting payroll deductions. These monies are deemed to be held in trust by employers until they submit them to the CRA. These transactions are processed through CRA's Payroll Deductions system. Given the significant role that businesses play in collecting taxes on behalf of the CRA, we work to ensure the integrity of this process.

Our Trust Examinations Program reviews and examines source deductions and GST/HST collections by businesses.

In 2011-2012, the total value of identified employer compliance activities was $1.7 billion, up slightly from the $1.6 billion we identified last year.

risk and the audit process

Risk assessment is the foundation of the CRA's approach to addressing income tax non-compliance. Generally speaking, audit interventions are reserved for the most serious instances of non-compliance. However, a measured amount of audit resources are also invested in research audits and other compliance-related projects. These projects allow the CRA to identify emerging risks and to validate the effectiveness of our risk assessments, so that we constantly refine the strategies we use to address risk.

The Research Audit Program is a four-year project that will establish statistically valid compliance rates for various industry sectors and enable us to more accurately identify potential non-compliance in the future.

In the small and medium enterprises sector, we address common compliance issues in higher-risk sectors and write taxpayers to alert them to potential inaccuracies.

In some cases, the letters might be used to explain what type of deductions are permitted under the Income Tax Act and the type of documents needed to substantiate such claims. Businesses are then asked to review their returns and, if they have any questions or concerns, to get in touch with our office. This method of contact with businesses often leads to taxpayers amending their returns and changing their approach to future tax returns.

In 2011-2012, our audit programs identified over $8.7 billion Footnote 4 in non-compliance by applying a risk‑based approach.

• Income tax audits of taxpayers in our small and medium programs identified over $1.5 billion in non-compliance.
• Income tax audits of taxpayers in our international and large-business programs identified over $5.6 billion in non‑compliance.

gst/hst

Businesses can receive a refund cheque if their input tax credits are higher than the GST/HST collected. In 2011‑2012, we implemented a model to improve our pre‑payment review of GST/HST refunds by making sure that we screen GST/HST credits and certain debit returns consistently.

• Audit activity related to GST/HST identified over $1.1 billion in non-compliance.

non-filer/non‑registrant

This program is responsible for identifying individuals, corporations, and trusts that do not file tax returns, and businesses that should be registered to collect and remit GST/HST.

We use a graduated approach to address filing and registration non-compliance. This includes sending a letter, calling a taxpayer, or using our specialists to identify taxpayers who have not registered or have outstanding tax returns.

As a result of this program in 2011‑2012:

• $2.6 billion in taxes were identified;
• 630,384 returns were identified and filed;
• 8,569 business were identified and registered for GST/HST; and
• 154,671 GST/HST delinquent filers were identified and addressed.

Our actions contributed to 99% of corporations and 97.5% of individuals filing their returns within five years of the filing due date.

The CRA is always looking at new methods to encourage taxpayers to comply. This year we launched a project to send new GST/HST registrants and employers automated reminders of the dates that their returns and payments were due. We found that the registrants we contacted were 12% more likely to comply than those we did not contact. These results are encouraging and we will continue to test this reminder service for new businesses in 2012‑2013.

aggressive tax planning

Aggressive tax planning is a challenge that developed countries are confronting. It can involve very complex structures with both domestic and international elements. It is often arranged by tax planners and promoters for individuals, trusts, and corporations, and may have a legal basis in a technical sense, but it goes beyond what Parliament intended when the laws were passed. In general, aggressive tax planning arrangements are made for the primary purpose of avoiding taxes. Left unchecked, aggressive tax planning is a risk to the integrity and fairness of Canada's tax system.

The CRA has a multi-faceted strategy to combat aggressive tax planning. It includes using specialists at our centres of expertise, working with other tax jurisdictions and the Organisation for Economic Co‑operation and Development (OECD), to share information on tax schemes, identifying legislative amendments to close loopholes discovered during audits, and working with the Department of Finance to negotiate international tax information exchange agreements.

This strategy resulted in identifying $1.3 billion in fiscal impact in 2011-2012.

Another part of our strategy involves third-party penalties to dissuade promoters from marketing aggressive tax planning arrangements. During 2011-2012, we closed a total of 17 third-party penalty cases. The total value of the penalties applied was in excess of $2.5 million.

charities

Registered charities in Canada are tax exempt and can issue charitable donation receipts to donors. To keep these privileges, registered charities must file a registered charity information return and financial statements, and they must operate within the parameters of the Income Tax Act.

Although cases of serious and intentional non-compliance are not widespread, they do exist. Examples include abusive tax shelter schemes as described in the aggressive tax planning section, issuing false receipts, and unacceptable fundraising practices.

The level of compliance by registered charities is high and remains stable in comparison to prior years. The long-term filing rate also remains high with the latest data available showing a rate of 98%.

• In 2011-2012, 1,104 registered charities were revoked for failure to file their annual return.
• We completed 713 audits of registered charities.
• Random audits resulted in three charities having their charitable status revoked.

scientific research and experimental development

In 2011, our Scientific Research and Experimental Development (SR&ED) program provided more than $3.6 billion in tax assistance to over 23,000 claimants, an increase of $100 million over the previous year. We also ensure that businesses prepare their claims in compliance with tax laws, policies, and procedures. As a result of those efforts, we identified and addressed $425 million of non‑compliance last year.

During 2011-2012, we continued to consolidate and clarify our current SR&ED policy documents and related guidance to help claimants better understand how the program works. Online public consultations ended in February 2012 and we expect to report the results in our 2012-2013 Annual Report to Parliament.

In October 2011, the Research and Development Review Expert Panel released its report to the Government of Canada on its review of federal support for research and development. The panel noted that the SR&ED program plays a fundamental role in lowering the costs of industrial Research and Development (R&D) for businesses, enhancing investment in R&D, and making Canada a more attractive place to locate R&D. The panel also provided recommendations to the Government of Canada on how to improve support for businesses and help them grow into larger, globally competitive companies. In the 2012 Federal Budget, informed by the advice of the Research and Development Review Expert Panel, the Government of Canada announced a number of legislative measures to simplify the SR&ED program and make it more cost‑effective, and administrative measures to enhance the predictability of the program. Over the next few years, the CRA will be implementing these measures.

underground economy

The underground economy is defined as undeclared income that is earned from economic activity that would generally be taxable if it were reported for tax purposes. The underground economy undermines the competitiveness of Canadian businesses because it offers an unfair advantage to those who don't comply with tax laws. These businesses impose a greater burden on all Canadians for funding social economic programs such as health care and education. Evidence shows that businesses participating in the underground economy also create other problems such as denying employees access to social programs like employment insurance, the Canada Pension Plan, or Quebec Pension Plan. Consumers are also affected: they have limited legal recourse for products and services provided by businesses participating in the underground economy.

We use a two-part approach to address underground economy activity. First, through our outreach efforts, we educate people and influence their attitude about compliance. Second, we use research such as the 2012 Statistics Canada report on the underground economy, to adjust how we allocate resources to sectors that show the highest risk. This Statistics Canada report Footnote 5 estimated that underground economic activity in Canada was equivalent to 2.3% of Gross Domestic Product in 2009, which was down from 2.9% in 1992.

This type of non-compliance is complex, so it is important for revenue administrations to share details about different approaches and experiences, successful or not, in dealing with these issues. The CRA continues to work with Canadian and international partners through research, information-sharing, communication, education, and compliance activities to reduce participation in the underground economy.

The CRA led the task group that produced the ‘Reducing opportunities for tax non-compliance in the underground economy' report for the OECD Forum on Tax Administration. The report was prepared to help revenue administrations advance their thinking and practices about identifying and handling risks related to the underground economy and electronic payment systems, and to promote discussion and knowledge-sharing on these important issues.

• In 2011-2012, we audited 10,627 underground economy files.
• 80% of the files audited resulted in a tax assessment.
• These audits identified $513 million of unreported income with an associated fiscal impact of $260 million.

enforcement

The Enforcement program undertakes audits and criminal investigations of those suspected of deriving income from criminal activities and of those who evade taxes.

The CRA addresses these cases of deliberate fraud and in some instances refers cases to the Public Prosecution Service of Canada. Taxpayers may face penalties, court fines, and up to five years in prison.

In 2011-2012, the program conducted 819 enforcement audits that resulted in finding $67.4 million of additional taxes owing. A total of 137 taxpayers were convicted of tax evasion or fraud, and 24 individuals received prison sentences.

The courts imposed $6.4 million in fines and 36 years of jail sentences. In addition, 120 income tax and GST/HST investigations were referred to the Public Prosecution Service this past year. Some results are lower than those of previous years because the files are more complex and require more resources to complete.

We issue news releases about convictions on tax evasion to local, regional, and national media to demonstrate that there are consequences to non‑compliance and to help maintain public confidence in the integrity of Canada's self-assessment system. In 2011‑2012, the CRA distributed 175 news releases on convictions to generate articles and broadcast news topics.

payment of tax debt

The final step in our compliance review process is to ensure that taxpayers pay any amounts due. An effective debt resolution program is a critical element in addressing non-compliance and protecting Canada's revenue base.

We processed approximately $419 billion in taxes and duties last year. Of this amount, more than $411 billion was received within the 2011‑2012 reporting period. Our receivables inventory that is less than one year old is $7.5 billion or about 1.8% of the gross receipts.

Over the past five years, our data indicates that most individuals and businesses pay their taxes on time, which continues to surpass our 90% target.

When taxpayers have not met their obligations, we use a range of enforcement actions with varying degrees of intervention.

It has been determined that our ability to collect a debt depends on both timely and efficient debt collection, as the longer the debt exists, the harder and more expensive it is to collect. We rely on approaches that favour swift actions, such as our Debt Management Call Centre, which addresses high-volume, low-risk tax debt at minimal cost, and allows our collection agents in tax services office across Canada to focus on addressing more complex and higher-risk accounts.

We continue to pursue more risk-responsive enforcement approaches to address non-compliance in our Accounts Receivable programs. We continue to update our strategies to respond to newer workloads and to increase our efficiency. Initiatives such as the Accounts Receivable National Inventory model, introduced in April 2011, and the professional sector pilot project aim to make our inventory management process more efficient.

• This past year, our tax services office agents resolved 61.6% of this new debt within the year of intake, surpassing our objective of 60%.
• The $18.4 billion tax debt we resolved in our tax services offices represents 94% of the dollar value of the intake of new debt in the past year.

Our performance measures for addressing non‑compliance

conclusion

The CRA implements robust checks and balances that protect Canada's revenue base from intentional and non‑intentional non-compliance. We met or mostly met all of our performance measures for addressing non‑compliance. The CRA's graduated approach to early intervention, complex intervention, enforcement, and payment of tax debt has proven to be efficient and effective. Long-term filing rates for individuals, corporations, and charities are close to 100%. Our enforcement actions identified $14.1 billion of non‑compliance. We also found that 90% of corporations and 94% of individuals remitted their taxes on time, and our debt management efforts resolved $40 billion of tax debt.

In 2012-2013, we will focus on higher risk cases. We will also continue to employ a suite of interventions allowing us to address non-compliance as early as possible while imposing the lowest burden on the taxpayer.

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Date modified:

2012-11-08