annual report to parliament 2012-2013]

[reporting compliance]

[program description]

The CRA's compliance activities seek to protect the integrity of the self-assessment tax system by identifying and addressing cases of non-compliance with Canada's tax laws. Our compliance interventions follow an escalating approach that moves from promoting compliance to enforcing it. We promote compliance by increasing taxpayers' understanding of their tax obligations through targeted outreach activities, client service, and education. We also undertake examinations, audits, and criminal investigations at the domestic and international level to ensure compliance with Canada's tax laws.

2012-2013 financial resources (thousands of dollars)

Total budgetary expenditure	Planned spending (Footnote 1)	Total authorities	Actual spending (Footnote 2)	Difference
985,132	1,074,885	1,233,061	1,170,474	(95,589)

Sub-program	Planned spending (Footnote 1)	Actual spending (Footnote 2)	Difference
International and large business	277,064	321,382	(44,318)
Small and medium enterprises	559,459	588,672	(29,213)
Audit professional services	69,171	83,818	(14,647)
Scientific research and experimental development	68,850	75,385	(6,535)
Criminal Investigations Program	72,828	77,212	(4,384)
Special Enforcement Program	20,369	17,336	3,033
Voluntary Disclosure Program	7,143	6,670	473
Total	1,074,885	1,170,474	(95,589)
Numbers may not add due to rounding.

(Footnote 1): Planned spending has been restated from what was shown in the Canada Revenue Agency 2012-2013 Report on Plans and Priorities in order to distribute the real property accommodations funding (previously centralized in the internal services program) to all applicable programs. It should also be noted that planned spending excludes severance payments, parental benefits and vacation credits, as this funding is received during the fiscal year and is only included in actual spending.

(Footnote 2): This figure represents the actual spending for the program on a modified cash basis. Please refer to page 156 for an explanation of how this figure relates to the CRA Financial Statements - Agency Activities.

2012-2013 human resources (full-time equivalents)

Sub-program	Planned	Actual	Difference
International and large business	2,419	2,312	107
Small and medium enterprises	5,183	5,893	(710)
Audit professional services	616	605	11
Scientific research and experimental development	625	588	37
Criminal Investigations Program	630	564	66
Special Enforcement Program	224	161	63
Voluntary Disclosure Program	81	77	4
Total	9,778	10,200	(422)
Numbers may not add due to rounding.

[sub-program description]

International and large business	The International and Large Business Program helps to ensure that Canada receives its share of taxes from international and large corporations with complex financial transactions. It enforces compliance with Canada's tax legislation by encouraging, assisting, and verifying compliance by large corporate tax filers. This is done through taxpayer consultations, education, legislative reviews, and enforcement measures.
Small and medium enterprises	The Small and Medium Enterprises Program enforces compliance of Canada's tax legislation by the small and medium businesses and non-resident taxpayers. It supports compliance through taxpayer consultations, education, and partnerships with stakeholders. The program uses risk management principles to apply a balanced approach to audit enforcement activities including associated client assistance, service and quality audits.
Scientific research and experimental development	The Scientific Research and Experimental Development and Film Tax Credit programs provide tax assistance and investment tax credits to Canadian businesses as an incentive to conduct qualifying industrial research and development activities and film or video production activities in Canada. These programs ensure that all claims are in accordance with the legislative requirements, tax laws, policies and procedures. They also ensure that the applicants are provided with information and timely services they need to access investment tax credits, and that the tax credits or cash refunds are delivered in a timely, consistent and predictable manner.
Criminal Investigations Program	The Criminal Investigations Program (CIP) enforces the Acts administered by the CRA by detecting and addressing tax evasion and fraud. CIP conducts investigations into suspected significant cases of fraudulent non-compliance and will recommend such cases for prosecution. To enhance public awareness and encourage voluntary compliance, CIP also publicizes the results of court convictions.
Voluntary Disclosure Program	The Voluntary Disclosures Program facilitates compliance with Canada's tax legislation by fostering and processing voluntary disclosures by non-compliant taxpayers and/or their representatives who wish to come forward and correct inaccurate or incomplete information.

[performance analysis and lessons learned]

[detecting and addressing reporting non-compliance]

Compliance with Canada's tax laws ensures the integrity of our self-assessment tax system. Every corporation, estate, trust, or individual who has to pay taxes is required by law to determine their taxes payable for the year and to file a tax return. Tax audits are conducted to verify that these amounts are accurately reported, and the tax payable is correctly calculated. The audit process ensures that Canada's tax system is fair, and that everyone pays their required share.

Audit workloads are segregated into three broad categories: International and Large Businesses (ILB), Small and Medium Enterprises (SME), and GST/HST. In addition, the CRA dedicates specific resources to addressing key areas of concern like aggressive tax planning and the underground economy. Reporting non-compliance is also about tax evasion, fraud, and other serious violations of tax laws. In these cases, the CRA conducts investigations that can result in prosecutions, court-imposed fines, or jail time.

An effective audit program depends on high quality business intelligence to ensure that only the highest risk files are selected for audit review. We extract and analyze information from the data we receive to create models that help us identify trends and non-compliant behaviour. We look for things like patterns of poor compliance or business performance out of step with industry norms. This approach helps us focus our resources on taxpayers who are most at risk of reporting non-compliance.

Audit planning is a necessary risk-management step to ensure the audit is done efficiently and that it does not create unnecessary inconvenience for the taxpayer. Auditors use the planning phase to determine the scope of their audits and to perform pre-contact analysis, including a detailed review of the tax return to identify unusual or questionable transactions. Audit planning helps reduce the length and cost of the audit process.

[auditing small and medium enterprises]

The goal of our SME audit strategy is to identify cases of reporting non-compliance and to take the appropriate corrective measures. We do this by reducing our interventions for low-risk groups of taxpayers and by focusing our audit resources on taxpayers who are at risk of non-compliance. In addition, we have begun to employ specialized teams to conduct comprehensive audits on taxpayers operating in high-risk sectors. This approach increases the effectiveness of our audits and reduces the burden on compliant taxpayers. While we are focusing our audit resources on high-risk files, we still maintain appropriate audit coverage levels for low-risk groups of taxpayers.

One of our recent initiatives to facilitate compliance is the Electronic Transfer of Accounting Data service, which enables taxpayers to transfer financial and accounting data to auditors. This will save time for taxpayers and their representatives and allow them the flexibility to send us data outside their normal business hours from anywhere in the world.

In 2012-2013, we exceeded two important performance targets: we adjusted a higher percentage of tax returns we audited, and our audit activities generated a higher fiscal impact per full-time equivalent (auditor). We did, however, complete a lower number of total audits than we did in 2011-2012. This is in part because of our strategic decision to focus more resources on auditing high-risk files. As we move forward, we expect that our new approach to selecting high-risk files and using specialized teams will continue to increase the fiscal impact of our SME Program.

Key results:

• We completed 171,028 files, compared to 180,701 in 2011-2012
• We reassessed 79% of the files we audited, well above our target of 75%
• The average fiscal impact generated was $423,000 per full-time equivalent, well above our target of $350,000

[auditing international and large businesses]

Our International and Large Business (ILB) Program is responsible for ensuring that Canada's largest and most complex corporations remain compliant with Canada's tax laws. A key element of our approach is building and improving our relationship with large businesses and promoting a transparent and cooperative approach to compliance. Maintaining an open relationship with large businesses helps to provide early tax certainty for businesses. It also gives them a clearer understanding of our application and interpretation of the legislation we administer. Our goal is to identify and resolve as many reporting issues as possible in a timely manner, before the non-compliance occurs.

Tax administrations around the world are looking at increasing cooperation to better assess and enforce compliance for international and large businesses. In 2012, the CRA started a pilot project involving a joint audit with another tax administration. International joint audits represent a new form of coordinated action between tax administrations.They require the collaboration of two tax administrations to form a single audit team to examine the transactions of a business operating in both countries.

The concept of joint audits presents clear advantages over conventional audit approaches; they provide early tax certainty and minimize the compliance burden, which benefits the tax administrations and the business. In addition, the joint audit team can leverage the legislative powers and information-gathering tools of their respective tax jurisdictions to more efficiently resolve compliance issues. Joint audits also gives the CRA an excellent opportunity to gain insight into the best practices of other tax administrations. We are monitoring the outcomes of this pilot project to develop procedures and guidelines for future joint audits with our international partners.

Promoting transparency and cooperation benefits the CRA and taxpayers. Businesses want a certain degree of certainty when managing their tax affairs. This is one of the reasons we often negotiate advance pricing arrangements (APA) with multinational corporations. An APA is a formal agreement that provides a mutually acceptable transfer pricing methodology between the CRA and a business for the purpose of future intercompany transactions. Every arrangement completed removes uncertainty for both the business and the CRA and reduces the risk of double taxation and litigation.

Negotiating an APA can be resource intensive, as it often requires additional research to resolve differences between the CRA and foreign tax administrations on transfer pricing positions. It can take several years to process an APA from the moment the case is accepted to the signature of the agreement. The process can be lengthened considerably if there are substantial differences between the CRA and foreign tax administrations. However, the outcome of these negotiations directly impacts the tax treatment of billions of dollars worth of cross-border transactions. As a result, the long-term benefits for both businesses and the government of Canada are well worth the investment required. APAs serve to secure billions of dollars of taxable income that otherwise might have been lost.

The expertise gained from working on complex ILB files is invaluable to us. Some of our most experienced auditors work as industry specialists or business valuation experts as a result of their in-depth knowledge of industry practices. We are increasingly using the expertise of these specialists to help us deal with complex international business operations and accounting practices. The sound judgement of our audit experts remains the essential factor in our success.

The reach and influence of our auditors also goes beyond Canada's borders. Our auditors regularly provide technical assistance through their participation in international conferences, training sessions, and seminars. CRA auditors are key players in organizations such as the OECD and the Inter-American Centre of Tax Administrations. In 2012, for example, we participated in five learning events offered by the OECD Global Relations Programme, which engages interested countries in a dialogue on the development and implementation of global tax standards. These activities help to transfer tax expertise and to build the technical capacity of tax administrations around the world.

The CRA is continuously looking to improve the ILB Program. Our goal is to focus our efforts on high-risk files and to reduce the compliance burden on taxpayers. To that end, we made several changes to our ILB Program to improve program efficiency.

• The CRA began studying the feasibility of forming temporary specialized teams with unique knowledge and skills to support field auditors dealing with complex audits. These teams would be created as needed and dissolved upon the resolution of the audit. They would comprise audit specialists from headquarters and the regions and could include other professionals like lawyers, valuation specialists, and industry specialists. These specialized teams could be an important response to the increasingly complex issues faced by our auditors in the ILB Program.
• Employees of our Aggressive Tax Planning Division are now involved from the start of an audit in our ILB Program if ATP is identified as a possible issue of concern. This will reduce the number of interactions between the CRA and businesses during the audit process.
• We worked cooperatively with large businesses to help prevent non-compliance. This was accomplished through in-person meetings and agreements with businesses to confirm what they need to do to be compliant. This collaborative approach to compliance has been well received by businesses.
• We continued to reap the benefits of our shift to a more risk-based approach to audit selection. In addition to deploying our audit resources more effectively on high-risk files, we are reducing the audit burden on compliant businesses.
• We renewed our emphasis on auditing tax returns for the most current tax years. We have been focusing on clearing up older files that sometimes involved the audit of returns that are several years old. We are working towards a real-time approach that will focus on auditing tax returns for current years.
• The CRA has started piloting a number of initiatives relating to national workload management. Our objective is to adopt a national workload model that enables us to allocate resources based on file risk and the technical capacity of our auditors. This approach will improve the quality of our audits and reduce costs.

Key results:

• Our ILB income tax audit activities identified over $6 billion in total fiscal impact
• We completed 21,427 files, compared to 25,577 in 2011-2012
• We reassessed 85% of the files we audited, below our target of 90%

[aggressive tax planning]

Aggressive tax planning (ATP) represents an emerging threat to our tax base. Governments need a secure tax base to support investments in schools, hospitals, and other vital government services. ATP undermines the integrity and fairness of Canada's tax system and erodes the tax base.

ATP is generally facilitated through schemes that involve very complex financial structures with both domestic and international components that are designed for the sole purpose of avoiding the payment of taxes. They are often arranged by tax planners and promoters whose operations include connections in countries that are known to be tax havens. The globalization of trade, the easy movement of people and money across borders, and the growth of electronic commerce have made ATP a major concern for tax administrations around the world.

The CRA is working in collaboration with international partners to ensure that profits cannot be artificially shifted away from countries where the sales and income are generated. As part of this effort, we are expanding our network of tax information exchange agreements (TIEA). These agreements are essential for facilitating the kind of exchange of information required to deal effectively with ATP.

Another central part of our ATP strategy is to work closely with the Department of Finance, the Department of Justice, and other government partners to develop the legislative tools needed to effectively deal with ATP. This includes legislation to get better and faster access to information, close tax loopholes, and impose stronger sanctions on those who promote or participate in ATP schemes.

Budget 2012 contained several important measures to address aggressive tax shelters, the integrity and fairness of capitalization rules, and foreign affiliate dumping. Recent budgets also contained a number of legislative amendments designed to control the abusive use of foreign affiliates and the use of indirect loans and retirement compensation arrangements in ATP schemes.

Promoters who gain financially from designing, marketing, and promoting ATP schemes now face severe penalties for encouraging taxpayers to contravene Canada's tax laws. We believe that focusing efforts on promoters will have a wider impact to deter participation in mass-marketed ATP schemes. The OECD has stated that this strategy delivers faster and more cost-effective results than strategies that focus exclusively on the participants in these schemes.

In 2012-2013, the CRA successfully imposed 17 third-party (e.g. promoters) penalties resulting in over $46 million in monetary penalties. The number of third-party penalties imposed in the past year is a significant achievement and should have a direct impact on ATP promotional activities. This also potentially influences the behaviour of thousands of taxpayers who might have otherwise been persuaded to participate in these schemes.

Effectively controlling and containing the impact of ATP requires time and resources, as the problem is complex and there are no simple remedies or quick fixes. Our progress in combatting ATP must be understood within the context of initiatives and strategies that often take years to bring to fruition.

Recent initiatives and developments related to ATP include:

• The launch of a campaign to protect taxpayers from gifting tax shelter schemes. The assessment of tax returns for individuals is now put on hold when they include tax credits related to gifting tax shelter schemes.
• A campaign to identify ATP schemes involved in the promotion of the tax-free withdrawal of RRSP contributions. RRSP trustees with potentially high-risk investments are being identified and reviewed.
• The CRA worked with the Ontario government to help introduce anti-ATP legislation similar to the rules introduced by the federal government as part of Bill C-48. The CRA also negotiated a new agreement with the province on compliance activities focused on aggressive international tax planning.
• The Supreme Court of Canada and the Federal Court of Appeal issued two important rulings that will help us deal more effectively with ATP schemes. The Supreme Court ruled that central management and control over the trust property, rather than the residence of the trustees, was the appropriate test for determining residency according to the Income Tax Act. Additionally, the Federal Court of Appeal ruled that a dividend is received by a taxpayer when funds have been distributed from a corporation on the interruption or reorganization of its business.

Key results:

• We completed 16,556 files, compared to 21,506 in 2011-2012
• Our audit activities identified over $1.3 billion in fiscal impact, an increase of 2% over 2011-2012

[the underground economy]

The underground economy (UE) relates to any economic activity that goes unreported for tax purposes. It has a corrosive effect on the integrity of Canada's tax system, the competitiveness of businesses, and the ability of the government to balance its budget. The CRA commits significant resources to the identification and pursuit of those who willfully participate in the UE. We are particularly concerned about sectors of the economy where cash transactions are common and the temptation to participate in the UE is high.

The CRA uses different strategies to deal with the UE. This includes compliance research, outreach, education, communications, and targeted compliance activities. Assessing progress against the UE can only be done by looking at longer term trends and results. To this end, the CRA commissioned Statistics Canada to update their UE estimates. These new estimates were released in September 2012.

Statistics Canada found that the UE as a percentage of gross domestic product (GDP) declined between 1992 and 2009. The UE as a percentage of GDP fell from 2.9% in 1992 to just 2.3% in 2009. The study also found that the three most significant industry sectors in 2009 were construction (29%), retail (20%), and accommodation and food services (12%).

The exact reasons for this decline are difficult to determine. The drivers of UE activity are complex and many of them are beyond our control as tax administrators. According to the OECD, one reason for the drop in UE activity is that industries traditionally considered at high risk are declining as a percentage of the overall economy. Meanwhile, sectors less prone to UE activity are contributing a relatively larger share to our GDP. Along with other sources of business intelligence, the CRA will use this new information to better understand the size and nature of the UE and to adjust our strategic approach accordingly.

In 2012-2013, the CRA continued to commit significant audit resources towards reducing the UE. We focused our efforts on industry sectors that have traditionally been at risk for UE activity. The CRA identifies files for UE audits by examining an individual's reported income against lifestyle or by reviewing information supplied by informant leads.

We believe that education can also play a significant role in reducing participation in the UE. We created a course called Responsible Citizenship and Canada's Tax System to teach young Canadians about the relationship between the self-assessment tax system and the quality of life in Canada. In 2012-2013, 2,296 students received this course. Although the impact on compliance is difficult to measure, the CRA believes that teaching Canadians about the link between responsible citizenship and taxation is essential to winning tomorrow's fight against the UE.

We also worked with provincial and territorial organizations to conduct community visits. We participated in public speaking engagements and educational activities in high schools and trade schools. Our UE outreach activities help us establish a greater presence in the community and improve our relationships with individual taxpayers. They also provide an opportunity for small businesses and individuals to get immediate responses to their tax queries.

Recent developments and initiatives related to the UE include:

• The CRA met with representatives of the Federal/Provincial/Territorial Underground Economy Working Group to reduce the impact of the UE through joint research and actions.
• The CRA continued to engage local communities and provincial and territorial governments to find better ways to reduce the impact of the UE.
• The CRA exchanged information with OECD members on issues relating to UE research and best practices.
• The CRA continued to work closely with industry groups like the Canadian Home Builder's Association to reduce the impact of the UE.
• The CRA established specialized regional audit teams to target UE risks that may be unique to specific regions.
• The CRA continued to validate the estimated suppressed sales from zapper use.
• Budget 2013 introduced new administrative penalties and criminal offences to address the electronic suppression of sales software. These new sanctions will take effect on January 1, 2014, or when the enacting legislation receives royal assent.

In 2012-2013, we increased the total dollar value of taxes assessed by more than 17% compared to 2011-2012. Also, we reached more individuals through our outreach activities in communities across Canada than we did in 2011-2012.

Key results:

• We audited 10,822 UE files. The total dollar value of taxes assessed was $305 million, an increase of 17% over 2011-2012
• The SME Program conducted 1,786 visits for all outreach activities related to the UE, an increase of 18% over 2011-2012
• Our outreach activities reached 33,117 participants, an increase of 33% over 2011-2012

[GST/HST]

The goods and services tax (GST) is collected on most goods and services purchased in Canada. The harmonized sales tax (GST/HST) is in effect in Nova Scotia, New Brunswick, Ontario, and Newfoundland and Labrador. The Government of Prince Edward Island recently became an HST province, effective April 1, 2013.

The CRA relies on businesses to assess their own GST/HST liabilities, file returns, and pay amounts due. Because the GST/HST is only paid by the end buyer of the taxable supply or service, businesses are able to recover the GST/HST they have paid in the form of input tax credits.

The CRA has recently created efficiencies by centralizing the GST/HST workload in centres of expertise. We now have specialized teams devoted only to ensuring GST/HST reporting compliance.

Recent GST/HST developments and initiatives include:

• The refinement of our risk-assessment models to better identify business registrants participating in the UE.
• The implementation of a national inventory model in April 2012 to improve our focus on high-risk files across the country. This new approach allows us to accelerate the payment of low-risk claims. All GST/HST credit returns from across Canada are now worked through this national inventory.
• The Government of British Columbia returned to the provincial sales tax/ goods and services tax (PST/GST) model on April 1, 2013. The CRA had administered the HST in British Columbia from July 2010 to March 2013.

We created a separate GST/HST audit business line to accommodate the harmonizing of the GST with the provincial sales tax of Ontario. As a result, we did not meet our projected change rate target. However, we are improving risk assessment and file selection, which we expect will have a positive impact on our GST/HST change rate in the future.

Our pre-assessment national inventory has helped us identify high-risk files. The total additional tax dollars assessed as a result of GST/HST audits is significantly higher than last year.

Key results:

• The CRA completed 89,409 GST/HST audits
• The total additional fiscal impact as a result of GST/HST audits is $1.5 billion, an increase of 31% over 2011-2012
• We reassessed 67% of the files we audited

[enforcing reporting compliance]

Our Criminal Investigations Program is tasked with investigating suspected cases of tax evasion, fraud, and other serious violations of tax laws and recommending cases to the Public Prosecution Service of Canada (PPSC) for prosecution.

Criminal investigations activities represent the far end of the compliance continuum. The Criminal Investigations Program investigates and gathers sufficient evidence to support a criminal court conviction. On occasion, we conduct joint investigations with the Royal Canadian Mounted Police (RCMP). We also work closely with the Financial Transactions and Reports Analysis Centre of Canada.

When individuals are convicted of tax evasion, they must repay the full amount of taxes owing, plus interest and any civil penalties that are assessed by the CRA. In addition, the court may impose fines of up to 200% of the taxes evaded and a jail term of up to five years.

The CRA publishes conviction results for all individuals, corporations, and trusts found guilty in the courts of tax evasion. We do this to increase public awareness of our enforcement programs and to maintain public confidence in the integrity of our self-assessment tax system. We also hope that publicizing convictions will have a deterrence effect. The CRA will ensure that any serious abuse of Canada's tax laws does not go unpunished or unnoticed.

Between April 1, 2006, and March 31, 2013, the Criminal Investigations Program successfully prosecuted 1,410 taxpayers involving over $196 million in federal taxes evaded. In total, the courts imposed fines over $108 million along with 4,063 months in jail terms.

Over the last decade, the level of fraud involving value-added consumption taxes like the GST has risen in Canada and around the world. The fraudulent claiming of input tax credits has become a major source of funds for tax fraudsters who create fictitious businesses, register GST/HST accounts, and then file fraudulent refunds. In April 2012, the CRA successfully prosecuted two individuals who were found guilty of GST/HST tax fraud worth millions of dollars and sentenced accordingly.

In 2012-2013, the CRA saw its first three convictions of tax protestor promoters for counselling others to evade taxes. In all three cases, hefty fines and lengthy prison terms were handed to the individuals involved. This is a significant development because these promoters often land uninformed individuals in serious financial, tax, and legal difficulty.

In 2012-2013, we implemented the recommendations of an internal program evaluation report and undertook a number of initiatives to improve our Criminal Investigations Program:

• The CRA set up six criminal investigations offices to create a critical mass of investigators to address the most complex cases of tax evasion and fraud. The location of these offices will enable the CRA to strengthen cooperation with its key partners, the RCMP and the PPSC.
• We increased our focus on gathering evidence to support criminal charges.
• The CRA developed a new workload model to refine file selection for criminal investigations. This process is managed at the national level.
• We dedicated more resources towards compliance enforcement involving the promoters of tax evasion schemes and the pursuit of files related to aggressive international tax planning.

Investigating suspected cases of tax evasion is a lengthy process and cases often take years to come to fruition. Investigations are taking longer as a result of the complexity of fraudulent tax schemes, particularly those with links to income and assets offshore, and the digitizing of information. For example, search warrants concerning tax fraud investigations can sometimes yield millions of pages of digital information. Analysing this data requires time and specialized technical resources. In addition, obtaining evidence located outside Canada is an expensive and challenging process. We expect that the significant changes we have implemented as a result of our business transformation will have a positive impact on our Criminal Investigations Program.

Key Results:

• Our enforcement activities identified $46 million in additional taxes owing
• The PPSC conviction rate was 96%
• The percentage of cases with mandatory jail terms was 23%, up 5 percentage points over 2011-2012
• The average jail term was 22 months, up from 18 months in 2011-2012

[voluntary disclosure program]

The CRA's Voluntary Disclosures Program (VDP) gives taxpayers an opportunity to come forward and self-correct, potentially avoiding punitive penalties or prosecution. However, taxpayers who make voluntary disclosures still have to pay all outstanding taxes and interest due. These disclosures can include unreported or under-reported income from employment or business, unreported capital gains, or any error made on a tax return filed previously. The nature of the information disclosed by taxpayers allows the CRA to gain valuable insight and intelligence on tax avoidance and aggressive tax planning schemes.

Key results:

• The CRA processed 15,133 VDP cases, an increase of 11% over 2011-2012
• The VDP found more than $1.2 billion in unreported income, an increase of 40% over 2011-2012

[scientific research and experimental development]

The Scientific Research and Experimental Development (SR&ED) Program is an important federal tax incentive program administered by the CRA. It provides support to Canadian businesses to encourage research and development (R&D) in Canada. The SR&ED Program offers claimants tax incentives in the form of income tax deductions and investment tax credits based on their expenditures like wages, materials, and machinery on eligible SR&ED work done in Canada.

The Income Tax Act provides a definition of scientific research and experimental development and describes eligible SR&ED work and expenditures. We give information and services to help businesses determine if their R&D work and expenditures are eligible for these tax incentives.

We review the technical and financial aspects of all SR&ED claims. This is an important check to ensure that the program operates as intended and that SR&ED work and expenditures meet the specific requirements defined in the Income Tax Act. Our focus is on identifying high-risk claims and using a more tailored strategy to address key areas of concern.

In 2012-2013, the CRA started work on a number of initiatives to improve the predictability and the accessibility of the SR&ED Program.

• The CRA released new, consolidated SR&ED policy documents and reorganized its SR&ED Web page content to present information in a more user-friendly way. The goal of this initiative was to make compliance easier by clarifying and simplifying SR&ED policies.
• The CRA is improving its self-assessment and learning tool, which is designed to assist businesses in determining the eligibility of their R&D work for SR&ED tax incentives. We expect to release this updated tool in 2013-2014.
• The CRA launched a pilot project to establish the feasibility of a formal pre-approval process (FPAP) for SR&ED claims. The FPAP will provide better certainty to businesses on the eligibility of their SR&ED claims before filing. During the pilot, the CRA will be working with a number of businesses to receive feedback on FPAP.
• We increased our engagement with stakeholders by meeting with industry representatives to discuss and address emerging SR&ED program issues. These discussions will continue to be held regularly.

Our results indicate that more businesses are receiving tax assistance over time. In addition, we continued to meet our performance targets for our four service standards for the processing of SR&ED claims and requests.

Key results:

• The CRA provided more than $3.6 billion in tax assistance in support of industrial research and development
• The CRA processed 28,140 claims, compared to 28,993 in 2011-2012
• The CRA provided tax assistance to over 23,000 claimants through the SR&ED Program, an increase of 27% over the number of claimants who received tax assistance five years ago
• The CRA processed 96% of SR&ED refundable and non-refundable claims within 120 days and 365 days respectively, well above our target of 90%
• The CRA identified $404 million in non-compliance, compared to $424 million in 2011-2012

[conclusion]

Compliance with Canada's tax laws ensures that Canadians will continue to enjoy public services that are making a difference in their everyday lives.

The CRA conducts audits to maintain the public's confidence in the CRA's ability and willingness to enforce existing tax laws. An audit is one of the most resource intensive activities undertaken by the CRA. As such, it must be supported by strong risk-assessment tools and carefully planned.

The CRA puts a lot of effort into helping taxpayers get it right from the start so that they can more easily comply with tax laws. Intervening before events occur and lowering the risk of non-compliance for taxpayers is essential to reducing the cost of compliance for both taxpayers and governments. This is why we will continue to look for ways to provide taxpayers with better compliance support.

Collaboration with other tax administrations is a key component of our international strategy to combat non-compliance with Canada's tax laws. A transparent, collaborative process for exchanging information between countries is invaluable in supporting the international examination of tax issues. To that end, we will continue to pool expertise and knowledge with other tax administrations to implement best practices. The CRA will continue to contribute to efforts to strengthen the legislative framework for international taxation through international forums like the OECD.

The CRA continues to safeguard the integrity and fairness of the tax system through a comprehensive approach that works to support compliance and assists taxpayers to comply. However, our primary focus will still remain the detection and correction of reporting non-compliance. Our intention is to continue to execute that mandate through the vigorous pursuit of non-compliance and other serious violations of Canada's tax laws.

[volumetrics]

Fiscal impact (Footnote 1)	2010-2011	2011-2012	2012-2013
International and large business (ILB) ($ billion)	$6.1	$5.6	$6.1
Small and medium-sized enterprises (SME) ($ billion)	$1.5	$1.5	$1.3
Goods and Services Tax/Harmonized Sales Tax (GST/HST) ($ billion)	$0.7	$1.1	$1.5
Other audits ($ million)	$626	$543	$497
Overall fiscal Impact ($ billion)	$8.9	$8.7	$9.4

(Footnote 1): $547 million dollars of fiscal impact was refunded during 2012-2013 through the resolution of double taxation issues with Canada's treaty partner countries. This amount had been included in our program results for prior years.

[performance results]

Expected results	Indicators	Targets	2010-2011	2011-2012	2012-2013
Reporting non-compliance is detected and corrected by better targeting of compliance actions through effective risk assessment	Fiscal impact generated per audit FTE ($ million)
	International and large business - income tax (Footnote 1)	$2.7	$3.0	$2.9	$3.2
	Small and medium-sized enterprises - income tax (Footnote 1)	$0.35	$0.41	$0.44	$0.42
	Goods and services tax/harmonized sales tax	N/A (Footnote 2)	$0.47	$0.58	$0.59
	Other audits	$0.39	$0.42	$0.39	$0.38
	Overall	$0.9	$1.02	$1.01	$1.06
Income tax and GST/HST audits and examinations detect and address non-compliance with the reporting requirements of the Acts administered by the CRA	Percentage of cases resulting in a change
	International and large business - income tax (Footnote 1)	90%	94.1%	87.6%	85.1%
	Small and medium-sized enterprises - income tax (Footnote 1)	75%	78.1%	77.9%	79.5%
	Goods and services tax/harmonized sales tax	75%	65%	63.4%	66.8%
	Underground economy	75%	78.4%	79.8%	81.2%
Eligible claimants receive timely scientific research and experimental development tax incentives	Percentage of claims processed within target for the 4 service standards	100%	100%	100%	100%
Auditors receive timely advice, support and services to detect non-compliance, and taxpayers receive timely advice to facilitate compliance	Percentage of requests for real estate and business equity valuations actioned within 120 days of receipt	80%	94.4%	92.1%	96%
	Percentage of ministerial correspondence actioned within 30 days of receipt	80%	79.6%	78.1%	85.9%
	Percentage of individual learning plan requests for national intermediate and advanced taxation courses actioned	40%	45.8%	54.5%	67.7%

(Footnote 1): The results for 2010-2011 and 2011-2012 have been adjusted in order to report the Goods and Services Tax/Harmonized Sales Tax separately.

(Footnote 2): Not available: A target for the fiscal impact generated per audit FTE for the GST/HST is under development.

Date modified:

2013-11-06