Annual Report to parliament 2010-2011

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Chapter 4 – Making non-compliance more difficult

What it is

Taxpayers are expected to determine their own liability under the law, and then pay the correct amount of tax.

In instances where individuals and business either unintentionally or intentionally fail to fully comply, we use risk‑based processes that seek to detect and address specific instances of non-compliance.

We strive to make non‑compliance more difficult to ensure that all individuals and businesses meet their tax obligations and contribute to our goal of addressing identified non-compliance.

The information below sets out the overall spending levels for non-compliance over the period covered by this report
(in thousands of $)
Total authorities
$1,862,873
Actual expenditures
$1,846,313
Variance
$16,560
Full-time equivalents
17,984

What we achieved during 2010-2011

We continued our efforts in addressing identified non-compliance as indicated by our achievements. By making it harder for taxpayers to be non‑compliant, we ensured that more individuals and businesses paid the taxes they owe in 2010‑2011.
  • A filing rate, after five years, of close to 100% for corporations and 97% for individuals was achieved;
  • The value of identified non-compliance of our returns and reporting compliance activities reached $14.4 billion;
  • The number of taxpayers participating in gifting tax shelter arrangements showed a notable decline over the past five years; six registered charities were revoked for participating in such schemes; and, for the first time, a Third Party Penalty was assessed on a charity; and,
  • Our Tax Service Offices (TSO) achieved the second highest percentage, within the last five years, of resolution of new debt in the year of intake.

Where we go from here

We will continue to use tools and risk management techniques to direct our compliance efforts (reviews, audits, collections, investigations, etc.) to individuals, businesses, and not-for-profit organizations that are identified as being a high risk for not complying with Canada’s tax laws.

Our approach

There will always be taxpayers who choose not to comply. Through our compliance activities, as well as an active collections program, we limit the impact of those who unintentionally or purposely are non-compliant.

We maximize our results within a limited resource base through the application of a risk-based approach. First, we use risk management principles to identify current as well as emerging compliance risks. We assess these risks for their potential effects on Canada’s revenue base and on compliance levels in general. Second, we develop strategies to mitigate the greatest risks to compliance. These strategies address specific segments of the tax population or particular areas of non‑compliance, employing a mix of instruments such as third-party information slips and document matching, reviews, examinations and audits, and investigations. When warranted, we prosecute individuals and businesses in cases of willful non-compliance.

The results of our actions are reflected in the value of identified non-compliance achieved by our various compliance programs. This value represents our assessment of non-compliance and may be reduced through opportunities for taxpayer redress and may be determined to be uncollectible.

Elements of tax non-compliance

Filing and Registering:

Individuals and businesses who fail to file income tax returns and/or to register for GST/HST

Reporting:

Income is undisclosed or understated, and/or expenses/credits/rebates are overstated or over claimed on returns filed by individuals and businesses

Remittance:

Failure to pay outstanding tax-related debts owed by individuals, employers and businesses, and other government program debts owed to HRSDC.

Compliance activities

  • Employer withholding reviews and examinations
  • Trust account examinations
  • GST/HST Delinquent Filer Program
  • Non-Filer/Non-Registrant Program
  • Third-party information reporting
  • Exchange of information and international agreements
  • Compliance research
  • Risk modelling
  • Document matching
  • Audit and review
  • Applying penalties
  • Investigation and referral to the Department of Justice Canada for prosecution
  • Debt collection

Filing and registering non-compliance

The goal of the filing and registering compliance area is to ensure that taxpayers file a return and/or register for the GST/HST if they are required to do so. Our enforcement actions range from a simple request to file to more punitive measures, such as penalties and prosecution, and we make efficient use of available resources by focusing on early intervention. For example, this year, we piloted a project that identified new GST/HST registrants and new employers and contacted them, using existing telephony infrastructure, to provide an automated reminder of their first filing
and/or remitting due date. Accounts are identified and strategies are applied at the first signs of non-compliant behaviour according to recognized risk factors.

Accounts that do not respond to early intervention measures are considered high-risk. We identify these accounts through various means including third-party data and risk models. These accounts require human intervention and are referred for escalating enforcement action. The CRA also undertakes projects aimed at identifying and addressing filing and registration non-compliance in cases where there are no records on the CRA databases as well as where new or additional information is obtained.

This past year, an evaluation of the Non-Filer/Non-Registrant program was completed. This evaluation will contribute to the renewal of the national program delivery model. The overall intent is to create program improvements that will, over time, contribute to increased short and longer term compliance with filing and registration requirements, thereby furthering the CRA’s goal of making non-compliance more difficult.

Our activities extend to GST/HST registration requirements for businesses. Our estimate of the rate of registration compliance has remained consistently above our target over the past several years. Over the past year, 8,464 businesses were identified as required to register for GST/HST. By comparing our data with information from Statistics Canada, we estimate that 93% of businesses were registered to collect GST/HST during 2010-2011. This met our 90% target.

Our indicators
Current target
2006-2007
2007-2008
2008-2009
2009-2010
2010-2011
Canadian businesses that were registered for the GST/HST Table note 1
90%
97.8%
98.4%
95.8%
93.5%
93%
Individuals 18 years and older who filed their returns on time
90%
93%
92.5%
92.8%
92.8%
92.6%
Corporations – Taxable incorporated businesses that filed their returns on time Table note 2
90%
86.4%
85.8%
84.4%
85.5%
85.1%
Table note 1
These estimates use the number of businesses who file timely returns as a proxy for registrants. The population of businesses includes some small businesses which are not required to register as part of the calculation. As a result, the estimate may understate the proportion of businesses who actually register to collect GST/HST. Return to table note 1 source text
Table note 2
Almost all of taxable corporations used for this calculation filed their returns within 5 years, either voluntarily or as a result of our non-filer work. Return to table note 2 source text

In 2010-2011, our work to identify non‑filers generated 722,487 returns from individuals and corporate taxpayers that had not met their filing requirements. To gauge the compliance of individual taxpayers with their obligation to file a timely return, we compare our data for individual filers 18 years of age and older with Statistics Canada’s Census of Population data for this segment. For 2010-2011, 92.6% of this population filed their tax return on time, exceeding our 90% target. These estimates have consistently remained above the 92.5% level for every year since the 2001-2002 reporting year, providing a reliable trend for this high degree of voluntary filing compliance that we observe.

Our compliance rate estimates apply to those corporations which are taxable and have filed a Corporation Income Tax Return showing that tax is payable. The incidence of timely filing among such corporations in 2010-2011 was 85.1%, a result which is comparable with past years.

Another important measure of our success in addressing identified filing non-compliance is the increase in the observable long-term filing rate by both individuals and corporations. Our research on filing behaviour shows that, of the taxpayers who did not file their return on time, a majority file these returns within five years after the year the return was due. For example, 93% of individuals and 86.4% of corporations filed their returns on time for the 2005 tax year and, over the subsequent five years 97.4% of individuals and over 99% of corporations had filed their 2005 returns. In addition to the long-term filing rates witnessed, our actions identified $2.8 billion in non-compliance in 2010-2011.

Reporting non-compliance

Once a return is filed, we conduct various reviews and verification and risk assessment activities to identify areas where reporting by individuals, trusts, registered plans, and businesses is not consistent with taxpayers’ obligation to report complete and accurate information. Once identified we proceed to address the highest-risk accounts.

Related Risk
There is a risk that certain segments of the taxpayer population will increasingly push the boundaries and not fully report income or fabricate expenses to purposefully understate their tax liabilities.

Individual filers

All tax returns from individuals are subjected to risk assessment review by CRA systems, including, where applicable, a comparison to third-party information from employers, financial institutions, and other sources. Doing so improves the accuracy and completeness of information provided by the taxpayer, and assists the CRA in the identification of non-compliance. In addition, this process permits non-compliance risk information about taxpayers to be compiled and refined, with filed information (such as types of deductions or credits) compared over a multi-year period. Risk scores obtained from this process enable us to perform a number of targeted reviews in each tax year that focus available resources on population segments and specific lines on the return that hold the greatest risk of non‑compliance. At the same time, a review of a random sample of individual tax returns is conducted to learn about the non-compliant behaviour of the entire population of individual taxpayers with respect to key credits and deductions, and to measure the effectiveness of our targeted reviews.

In 2010-2011, we estimated that 17.6% of claims or deductions made by individuals on key tax credits and deductions not subject to third-party reporting were non-compliant, meaning they were disallowed following a review. The increase may be attributed, among other factors, to the change in deductions and credits that were reviewed in each program year.

Our Indicator
Current target
2007-2008
2008-2009
2009-2010
2010-2011
Key tax credits and deductions not subject to third‑party reporting – Individuals Table note 1
Downward trend
14.8%
16.5%
15.4%
17.6%
Table note 1
It should be noted that this type of non-compliance is found in a relatively small segment of the population of individual taxpayers. Return to table note 1 source text

One of our pre-assessment review programs is the Confidence Validity Program. Through this program, various deductions and credits on returns are reviewed and corrected before a notice of assessment is issued. During 2010‑2011, we identified an average of $472 of additional tax assessed per review, for a total of $162 million in taxes additionally assessed. This represents a decrease of 5% over the previous year. The variance is attributed to our review strategies which adjust the volume of each deduction and credit reviewed each year.

While the Confidence Validity Program corrects returns before the Notice of Assessment is issued, our Processing Review Program selects files for review after the assessment notice (and any refunds) have been issued. The program promotes compliance and helps to maintain confidence in the fairness of our programs through increased education, effective risk‑scoring systems, and a balanced approach to our file selection process. In 2010-2011, this program identified and assessed $232 million in additional taxes, an increase of 15% over the previous year.

Individual filers assessment programs
2007- 2008
2008-2009
2009-2010
2010- 2011
Confidence validity ($ million)
$126
$120
$171
$162
Processing review ($ million)
$190
$152
$201
$232
T1 matching ($ million)
$574
$623
$615
$600

Our T1 Matching Program compares information on an individual’s tax return with information provided by third‑party sources, such as employers or financial institutions. In 2010-2011, this program identified and addressed additional tax assessments of almost $600 million.

The objective of these three programs is not simply to assess dollar values but also to educate taxpayers by identifying common areas of misunderstanding. We gauge the effectiveness of our targeted reviews, by looking at the value of additional tax dollars assessed through them compared with random reviews. Over the 2007-2008 to 2010‑2011 period, our targeted reviews under the Processing Review Program, were approximately three times as effective as random reviews. Because the volume of each deduction and credit examined change according to our annual review strategies, in addition to claims being added or dropped, the average dollars recovered, and the ratio of targeted to random, vary each year.

Effectiveness of targeted reviews
2007- 2008
2008-2009
2009-2010
2010- 2011
Ratio of average additional dollars assessed in targeted over random reviews
3.6
3.6
3.6
3.0

Businesses

Identifying non-compliant businesses involves a combination of risk assessments, reviews, and audits. That’s because research and historical data demonstrate that not all taxpayers approach their tax obligations in the same way. For example, while many pay their taxes willingly and on time, others require varying degrees of intervention by the CRA to meet their obligations. For that reason, audits are selected through an evidence-based approach that uses research, numerous risk models and past compliance history to identify population sectors at risk for non-compliance.

In 2009-2010, our Core Audit Program selected self-employed individuals, referred to as Small and Medium Enterprises (SME), for examination. Small business audits include owner-operated businesses, small corporations, and partnerships that have annual revenues of less than one million dollars. Medium-sized business audits typically include individuals with annual revenues of over one million dollars and corporations with annual revenues of between one million and $20 millionFootnote 1 for income tax. Our auditors examine cases through telephone contact, letters, or face-to-face interviews.

In assessing small businesses that were subject to a random sample audit, we were able to estimate the percentage of businesses in this segment that are likely to be non-compliant to a significant degree. Non-compliant to a significant degree is defined as businesses that under report $5,000 or more in federal taxes.

In 2010-2011, a non-compliance rate estimate was established for SME filers based on audits conducted during the 2009-2010 program year. The estimated rate of non-compliance was found to be 12.2%. This segment of the SME population has been reviewed twice previously: once in 2001‑2002, when the non‑compliance rate estimate for self-employed individuals was 8.6%, and again in 2006-2007, when the non-compliance rate estimate was 12.7%.

Our Indicator
Current Target
2001- 2002
2006-2007
2009-2010
Estimated percentage of self-employed individuals with significant non-compliance
Downward trend
8.6%
12.7%
12.2%

One of the ways we evaluate our success in identifying non-compliance is by tracking how frequently a case selected for an audit results in an adjustment. For the past year, the percentage of cases resulting in a change for SMEs was 80.3%, down slightly from 2009-2010. A recent international benchmarking study showed the CRA change rates for full SME audits fell within the mid-range of the rates identified by the other countries involved in the study. We consider the change rate to be a key indicator of our performance. For this reason, we intend to give consideration to the leading practices identified through this study to determine if they are suitable for use by the CRA.

Effectiveness of targeted self-employed individuals audits
2006-2007
2009- 2010
Ratio of instances of non‑compliance in targeted versus random reviews
3.8
3.8

Research work conducted through our Core Audit Program indicates that our targeted audits of the self-employed individual population are 3.8 times more likely to identify significant non‑compliance than randomly selected audits. In other words, a random audit within this group identifies significant non‑compliance 12.2% of the time. But when the audit is targeted based on our research and risk assessment, we discover significant cases of non‑compliance 46.7% of the time.

In 2010-2011, we implemented the Research Audit Program (RAP) to replace the Core Audit Program. It conducts random audits that establish statistically valid levels of non-compliance within sectors of the Canadian economy. The RAP augments existing programs that gather risk intelligence at local, regional, and national levels and channels it into mechanisms used to establish workloads. We will begin gathering results from RAP assessments of the T1 Small and Medium Enterprises population in 2012.

Other SME-related activities include the Office Audit Program, Prepayment Risk Assessment Program, Specialty Audit Program, Film Industry Services Program, Non-Resident Audits, and International Waivers and Non-Resident Dispositions Program.

We are also enhancing our approach to ensuring compliance within the large business population. We assess risk levels using sector intelligence, CRA-based expertise, and information from our tax treaty partners. We further combine these resources with information related to the nature of the business in question and its current and past behaviour, including aggressive tax planning (ATP), which indicates the potential risk of non-compliant behaviour. This further evolution of our approach should enable us to focus our resources on those large businesses most at-risk of non-compliance. This will enhance change rates and encourage a level playing field for compliant businesses. For the past year, the percentage of cases resulting in a change for international large business programs was 94%.

In 2009-2010, we launched our Corporate Assessing Review Program (CARP). The main objective of the program is to validate the accuracy of our assessments by ensuring that corporations file accurate and complete information on their T2 Tax Returns and that reported amounts are consistent with applicable tax legislation. In 2010-2011, CARP reviewed more than 48,000 corporation returns generating assessments totalling more than $45 million dollars in additional federal and provincial tax. During this past year, we embarked on a number of reviews to ensure that tax reserves, pool balances, and tax credits were accurately represented based on businesses’ past and present reporting. Through this work, we detected and reduced overstated pool balances by $43 million. These are amounts that would have been available to corporations to reduce future tax payable.

Figure 5 Value of identified business non-compliance

Data quality: Good

In addition to the audits and reviews we undertake, our employer withholding and GST/HST examination activities enforce employers’ and taxpayers’ obligations to withhold, report, and remit source deductions, taxable benefits, and GST/HST. To increase and encourage compliance, we use a balanced approach to identify and address non‑compliance through the use of education, assisted compliance activities, and, where warranted, more rigorous actions, such as prosecutions. In 2010‑2011, 2.2 million non‑compliant cases were addressed. Although this represents a shortfall from our initial target of 2.6 million, it is explained by a realignment in workload which resulted in 500,000 cases being transferred to another area within the CRA. We also completed 556,227 reviews and exams and 15,056 GST/HST examinations which generated a total value of identified non-compliance of $1.6 billion.

Through a combination of our employer actions and our SME and large business audits and reviews, we identified $10.6 billion Footnote 2 of non-compliance for the 2010-2011 period. New this year is the introduction of a performance measure aimed at measuring the efficiency of our actions in identifying reporting non-compliance. This new measure (fiscal impact per audit FTE) demonstrates the value of our auditing work. For instance, in 2010-2011, each audit FTE addressed, on average, $2.9 million of fiscal impact for the large business population and almost $400,000 for the small and medium enterprise and other populations. Results for the most recent five years are available in our performance measurement framework.

Aggressive tax planning

Aggressive tax planning (ATP) schemes are arrangements purposely undertaken to minimize tax liability. These transactions, often arranged by tax planners and promoters for individuals, trusts, and corporations, are intended to reduce, avoid, or evade Canadian taxes and may be inconsistent with the spirit and intent of the law.

Related risk
It is possible that some taxpayers who have an interest in reducing their tax liability through careful tax planning will employ abusive tax practices to achieve results beyond the spirit or objective of the law.

These schemes sometimes involve international transactions or the use of tax havens. Left unchecked, aggressive tax planning presents a risk to the integrity and fairness of Canada’s tax system. Recognizing the problems inherent in relying on traditional audits alone, the CRA has a multi-faceted strategy to combat ATP.

The first component of the strategy is to strengthen legislation to reduce participation in ATP schemes. Over the reporting period, Finance Canada, with the support of the CRA, introduced proposed legislation that would require the mandatory reporting of tax avoidance transactions. This would provide an early warning system enabling us to gather information on tax avoidance schemes at an early stage and address them before they become a larger problem.

A second component is to use tax information exchange agreements, negotiated by Finance Canada, to reduce the ability of taxpayers to hide income and assets in overseas banks. Of note, Canada signed a Protocol amending the Tax Convention with Switzerland in October 2010.

The third prong of our strategy entails our work with international organizations such as the Seven Country Working Group, the Joint International Tax Shelter Information Centre and the Organisation for Economic Co-Operation and Development (OECD) to share intelligence and best practices to combat ATP.

In 2010-2011, we secured information from our partner countries which identified Canadian taxpayers participating in a significant ATP scheme. There was a large amount of media interest in this information and the resulting CRA action. Taxpayers are realizing these types of schemes are highly risky. Our Voluntary Disclosures Program continues to receive disclosures from taxpayers hoping to avoid penalties and prosecutions, by putting their tax affairs in order.

A final element of our multi-faceted strategy is to influence taxpayers by communicating our success in identifying ATP schemes, and outlining the consequences of tax avoidance and tax evasion. An example of the success we have had through communications is the reduction in the number of gifting tax shelter arrangements from 48,000 in 2006 to 10,000 in 2011. We achieved this reduction by identifying arrangements that appeared problematic, following up with audits of 100% of these tax shelter claims, targeting tax shelter alerts to participants, and following this up with a letter campaign.

Charities

Registered charities in Canada are tax-exempt and can issue charitable donation receipts to donors. To maintain these privileges, registered charities must operate within the parameters of the Income Tax Act. In cases of serious non‑compliance, contraventions can result in the revocation of the registered charitable status of the organizations involved. The overall level of compliance by registered charities with the requirements of the Income Tax Act is determined based on an analysis of the results of random audits conducted annually. For the past three years, audit results show that the overall level of compliance has been stable and confirm that the vast majority of registered charities are complying with legal requirements. While some charities required education on mostly minor compliance issues, very few serious issues of non-compliance were noted. For the third consecutive year, less than 4% of random audits resulted in a revocation action against a charity. In 2009 (the last year of complete data), 99% of registered charities filed an annual information return; of these, 61% of registered charities filed within the required six months of fiscal year end, with the remaining 38% having been filed late. Based on returns filed to date, we anticipate a similar filing rate for 2010.

Underground economy

The underground economy (UE) remains a priority for the CRA. Underground economic activity is any legal business activity that is unreported or underreported for tax purposes. The UE undermines the competitiveness of Canadian businesses because it offers an unfair advantage to those who fail to comply with Canada’s tax laws. UE activity is concentrated in sectors where cash transactions are prevalent between businesses and consumers, books and records are weak or non-existent, taxes are not deducted at source, third party reporting is absent, business-to-consumer transactions are generally widespread and services are commonly offered at a discount, and where there is greater acceptance of tax evasion by either individuals or by businesses. Compliant businesses and employers are put at a competitive disadvantage when UE activity takes place. It also deprives employees of access to social programs such as Employment Insurance (EI) and the Canada or Quebec Pension Plans (CPP or QPP), and makes it more difficult for consumers of UE products and services to seek recourse for poor workmanship or inferior materials. Participants in the UE effectively shift the burden of paying for government services and programs to compliant taxpayers.

Related risk
A number of independent studies have demonstrated that societal values are changing and subsequently there is an increasing chance of potential tax non-compliance.

A recent study by Statistics Canada on the size of the underground economy relative to the Gross Domestic Product showed a reduction of half a percentage point since 1992. We will continue our efforts to combat this area of non-compliance.

Figure 6 Underground economy as a percentage of Gross Domestic Product

Source: Statistics Canada: Estimating the Underground Economy in Canada, 1992-2008

Data quality: Good

Our UE strategy is to use a mix of outreach, education, communication, and compliance actions. This is supported by research and intelligence gathering and the systematic allocation of workloads to industry sectors with the highest risk. In 2010-2011, 78% of UE cases selected resulted in a tax assessment. These audits identified $595 million of unreported income with associated fiscal impact of $374 million. This amount represents an increase of 32% over the previous year.

In addition to our ongoing efforts in this area, a number of specific initiatives were conducted during the year to improve our intelligence and focus our efforts. For example, the Federal-Provincial-Territorial Underground Economy Working Group completed the Trade School Initiative. This initiative combined focus group research and a quasi‑experimental study to develop a prevention-through-education strategy by aiming appropriate messaging at an early stage in a typical career path, ideally before bad behaviours become entrenched. Construction trade school students were selected as the initial target audience and the initiative will be ready for a full scale launch in 2011-2012. As part our strategy to address the UE, we share best practices with other tax administrations. Over the reporting period, the CRA has taken the lead for OECD countries to write a paper on the cash economy and we are supporting the Netherlands which has the lead on writing the paper, “Right from the Start.” This approach uses outreach and communications to target new businesses to ensure that “Right from the Start” compliance is encouraged.

We also initiate regional and local projects to identify and study emerging issues, conduct research and gather intelligence, gain industry knowledge by working with associations and other levels of government, and determine the complexity and the range of compliance risk treatments required to resolve the problems uncovered.

Tobacco stamping regime

In 2010, Parliament passed legislative changes to implement a new tobacco stamping regime in Canada. The CRA responded immediately by developing the necessary framework of policies and procedures to manage the new tobacco stamping program. To ensure successful implementation, the CRA consulted regularly with stakeholders, including industry members. A detailed communication strategy was also developed that included industry outreach.

All implementation deadlines were met. We consider the successful execution of this initiative to be a very significant achievement.

GST/HST

The HST regime was extended to Ontario and British Columbia on July 1, 2010. Footnote 3 The HST now represents a significant source of tax revenue. In addition to significantly increased workload for the CRA, the combined federal and provincial rates entail increased compliance risks. The CRA is mitigating these risks through a dedicated GST/HST organization and increased focus on risk intelligence and assessment.

During 2010-2011, a review of business filings in our GST/HST pre-assessment program provided an early warning that a potentially significant number of large businesses would, perhaps inadvertently, not comply with HST reporting requirements for the recapture of input tax credits. This would normally result in audit action and the application of penalties. Our response was to take a proactive and constructive approach that involved acting on risk intelligence available from our systems to proactively communicate with businesses at risk of non-compliance to clarify their obligations and offer assistance where needed. Some 26,000 letters were sent to large registrants identified by our systems. Follow-up telephone calls were made to more than 15,000 businesses that were still at risk of non‑compliance after the mail-out, and subsequent calls are still being placed to a subset of these businesses that remain at risk. We have determined that compliance action, including re-assessment and penalty application, is necessary and appropriate for a smaller number of businesses and are proceeding with these steps. The distribution of tax revenues collected by the CRA to participating provinces is dependent on registrants reporting full and accurate information about their taxable expenses. The approach followed in this instance protected the revenue base of our client governments through early identification of businesses at risk, proactive compliance communication based on intelligence, assistance and follow-up. In addition, the presence of the CRA within the community of large taxpayers may have prevented significant reporting non-compliance from arising, and averted important audit expenses and compliance costs for businesses.

Enforcement

While the CRA has a sustained audit presence across sectors, our Special Enforcement Program is focused on addressing the small minority of taxpayers who are engaged in more serious acts of non-compliance. Our Special Enforcement Program conducts audits and undertakes other civil enforcement actions against individuals and businesses suspected of, or known to be, deriving income from illegal activities. Suspected significant cases of fraudulent non-compliance are dealt with by our Criminal Investigations Program, which investigates and refers cases for prosecution to the Public Prosecution Service of Canada (PPSC). These cases can result in penalties, court fines and up to five years of incarceration. We communicate the consequences of fraud committed against the Canadian public, to maximize the deterrent effect of these convictions. The CRA works with regional communications advisors to distribute news releases containing details of convictions on tax evasion to local, regional, and national media. In 2010‑2011, the CRA distributed 235 news releases on convictions which were used to generate articles and broadcast news topics. In 2010-2011, a total of 204 taxpayers were convicted of tax evasion or fraud. The courts imposed $22.8 million in fines and 47 years of jail sentences. For the reporting period, 129 income tax and GST/HST investigations were referred to the Public Prosecution Service of Canada.

The nature of this taxpayer segment makes it difficult to measure the influence of our enforcement program on others who may be considering similar non-compliant behaviour. This is, in part, because the drivers of non‑compliant behaviour among this population may go beyond strictly attempting to avoid taxes. Other criminal considerations may be at play.

Enforcement activities
2009-2010
2010-2011
Cases completed
928
834
Enforcement actions (including investigations))
3,374
3,388
Convictions
216
204
PPSC Conviction Rate
98%
100%
Courts imposed fines (million)
$11.9
$22.8
Jail sentences (years)
58
47

The effectiveness of CRA enforcement programs and activities is essential to achieving its compliance objectives. In 2010, a multi-year evaluation of the CRA’s enforcement programs was completed. The findings from the report are being incorporated into action plans to support a more focused approach for the Criminal Investigations and the Special Enforcement programs, which will enhance file selection and further build upon partnerships with the Public Prosecutions Service of Canada and law enforcement agencies. The rate of conviction is very high due to case selection. Cases are selected for prosecution based on their expected outcome as there is a high cost to this type of compliance intervention. In this way, Canadians and Canadian businesses are reassured that the most egregious cases are pursued to the fullest extent. The results achieved during 2010-2011 support our assessment that we contributed to making non-compliance more difficult.

Scientific research and experimental development program

The CRA oversees the integrity of various tax incentives that promote economic growth in Canada, such as the Scientific Research and Experimental Development (SR&ED) program. The SR&ED program is the largest single source of federal government support for industrial research and development. The CRA strives to deliver the tax incentives in a timely, consistent, and predictable manner, while ensuring businesses prepare their claims in compliance with tax laws, policies and procedures.

During 2010-2011, the SR&ED program provided about $3.5 billion in tax assistance to over 21,000 claimants. In addition, as a result of our risk assessment process, in 2010-2011, we identified and addressed $473 million of non‑compliance, an increase of 5.6% from the previous period.

Remittance

Once an assessment is completed through self‑assessment, or re-assessed through our subsequent verification actions, taxpayers must remit any amounts due. We use various means to collect the amounts that are owed to the Government of Canada in order to protect Canada’s revenue base.

Related risk
There is a risk that some taxpayers do not, or are unable to pay their taxes and fulfil their obligations

Almost all reported taxes are paid on time by individuals and businesses. In cases where monies owed are not paid when they become due, we pursue taxpayers using a range of collection and enforcement actions. To do so, we use a risk-based approach to identify the right compliance response for debtors, ranging from helping individuals further understand their obligations, to undertaking swifter and firmer responses with those whose history demonstrates a need for such action. The CRA manages the federal government’s largest debt collection service, collecting debt arising from taxes, related interest, and penalties owed to the Government of Canada. A recent international benchmarking study showed the CRA has the second lowest cost to collect a dollar of debt among the ten participating tax jurisdictions for the period studied.

Our indicators
Current target
2006-2007
2007-2008
2008-2009
2009-2010
2010-2011
Individuals who paid their reported taxes on time
90%
92.9%
91.5%
93.2%
93.7%
94.3%
Percentage of payable corporations taxes paid on time
90%
90.9%
92.4%
92.2%
93.5%
93.5%

In 2010-2011, almost $388 billion in taxes and duties were processed by the Agency. Of this amount, more than 97% was received within the current fiscal year. As indicated in the chart below, this situation has been stable over the past four years and is indicative of our receivables being well managed. The international benchmarking study referenced earlier noted that the CRA ranked first among the ten participating tax jurisdictions, for the period studied, in the collection of debt as a percentage of its revenue.

Gross Receipts and Receivables
2007-2008
2008-2009
2009-2010
2010-2011
Gross Receipts and receivables ($ billion)
371
366
361
388
Inventory less than 1 year old / Gross Receipts and receivables
2.5%
2.7%
2.8%
2.8%

In 2010-2011, our collections area continued to identify efficiencies and strategies related to current workloads as well as new business. As one example, our Debt Management Call Centre started handling another revenue line, deductions from employee salaries remitted by employers. This allows collectors at our Tax Services Offices to focus on more complex cases for these types of accounts. In preparation for the amalgamation of our national and regional pools into one national inventory, we centralized certain accounts, creating Centres of Expertise for these particular workloads. This past year, collections work related to the Harmonized Sales Tax (HST) on behalf of British Columbia and Ontario was initiated. This work has led us to examine our current practices for collecting GST, and has resulted in an enhanced focus on improved workload management practices and increased use of risk management, since it is anticipated that the introduction of HST will have an impact on the level of tax debt in this revenue line.

Figure 7 Allocation of year-end tax debt between TSOs, Automated Systems and DMCC, MRQ, and Other Receivables strategies

Data quality: Good

Managing tax debt poses a significant challenge since levels of indebtedness are strongly influenced by our external environment. According to the OECD’s 2010 Comparative Information Series report, tax debt is a growing problem for the majority of OECD countries. We have implemented strategies to address this issue, including our Payment Compliance Action Plan, which addresses the underlying cause of payment non‑compliance at the behavioural level. Nonetheless, we anticipate that the level of tax debt will continue to grow over the short to medium term.

At the end of the 2010-2011 fiscal year, our total tax debt inventory rose to about $27.4 billion, an increase of $2.4 billion over the prior period. This debt includes accounts for which a pending resolution has been reached (for example, the taxpayer has agreed to pay the debt over a specified time) but the debt has not yet been paid in full.

Early determination of our ability to collect debt facilitates both timely and efficient debt collection, since the longer the debt exists, the harder and more expensive it is likely to be to collect. For this reason, we continued to rely on our Debt Management Call Centre (DMCC), which addresses high volume, low-risk tax debt at a minimal cost. The DMCC represents a cost-effective early intervention with non-compliant taxpayers and, this year, our data mining model allowed us to change our business rules to adjust the timing of our attempts to resolve debt based on the likelihood that a taxpayer will self-resolve without intervention. The DMCC allows our Tax Services Office (TSO) agents to focus on addressing more complex, higher-risk accounts that involve the use of escalating collection measures, including legal and enforcement actions, to deal with non-compliant taxpayers.

Our automated strategies, including our Debt Management Call Centres and our Tax Services Offices addressed a total of $34.1 billion of tax during 2010‑2011. When compared to results from the previous year, this total represents an increase of 15.2%. Included in this result are amounts totalling $2 billion that were deemed to be uncollectable and have consequently been written-off. A recent international benchmarking study discussed the prevailing practices of other tax jurisdictions. The study noted that the CRA maintained, for the period studied, the lowest percentage of write-off to total tax revenue among the ten participants. In addition, it is important to note that this is an essential administrative function that is key to maintaining a healthy accounts receivable portfolio. The process is governed by both the Financial and Administration Act and the Bankruptcy and Insolvency Act, whereby accounts must meet prescribed criteria before being subject to write‑off.

Resolution of tax debt by strategy ($ billion)
2009-2010
2010-2011
Change
Automated and call centres
$15.3
$16.4
7.2%
Tax Service Offices
$14.3
$17.7
23.8%
Total tax debt resolved
$29.6
$34.1
15.2%

As explained earlier, timely resolution of debt facilitates our collection efforts. To assess our performance in addressing tax debt on a timely basis, we expect to resolve at least 60% of the TSO intake of new debt in the year of intake. In 2010-2011, we achieved 64.4%, exceeding our target.

The $17.7 billion tax debt we resolved in our TSOs represents 93.1% of the dollar value of the intake of new debt in the past year. This exceeded our target of 90%, indicating that we are successfully managing the higher risk inventory addressed by our TSOs.

Figure 8 2010-2011 TSO Intake, Resolution, and Inventory

Data quality: Good

As shown in Figure 9, the proportion of the age segments of our debt inventory has remained relatively stable over the last five years. This trend confirms that we are managing all segments of the tax debt portfolio in a consistent manner. The international benchmarking study noted previously also ranked the CRA second out of the ten participating tax jurisdictions with respect to debt aged less than one year for the period studied.

At the end of 2010‑2011, debt over five years old represented 16.9% of the inventory. In absolute terms, the dollar value of inventory greater than five years old at the end of 2010-2011 was $3.4 billion, which represents an increase of approximately $500 million from the previous year, but remains within our targeted threshold of 3.5 billion.

Figure 9 Age of TSO Tax Debt

Data quality: Good

Government program debt collection activities

The Government of Canada’s programs’ debt collections include defaulted Canada Student Loans, Employment Insurance overpayments, and other debts on behalf of Human Resources and Skills Development Canada. All new debts are now handled by our Debt Management Call Centre before being transferred to a TSO agent. In 2010-2011, we collected over $613.9 million, or $57.5 million more than our target.

Conclusion

Our core business outcome
Year
Performance rating
Data quality
Identified non-compliance is addressed
2010-2011
Met
Good

The Canadian tax system is based on self-assessment and relies on voluntary compliance supported by taxpayers’ trust in the CRA’s administration of tax laws. Recognizing that a small portion of individuals and businesses may unintentionally or intentionally fail to fully comply, we use a wide range of mechanisms to deter non-compliant behaviour, identify non-compliance on a risk basis, and correct the non-compliance when we identify it.

Making non-compliance more difficult is a challenging objective. Our strategic indicators, which show us trends in broad populations of taxpayers, show high levels of compliance with registration and filing requirements. While filing rates reached 97.4% for individuals and 99% for corporations within five years after their returns were due, other indicators suggest that reporting non‑compliance has stayed steady or increased. For example, our most recent estimate of material non-compliance by self-employed individuals shows a relatively constant rate of about 12% of the population. In addition, we have not seen a decline in the levels of identified non-compliance by individuals who claim key tax credits and deductions that are not subject to third-party reporting. Action taken by the CRA is only one of many factors that influence these indicators, but they are important signals to us as we develop strategies to combat non-compliance.

In assessing our effectiveness at making non‑compliance more difficult, we also consider the full range of results related to our activities, including whether we have met our operational targets, the steps we have taken to implement initiatives to improve our results, and how we responded to priorities that arose within the planning period. These measures are fundamental to our assessment, since they describe how well we deployed the resources we have available to identify and address non‑compliance. A review of the chapter shows that we have met the targets we set for this year. The change rates we achieved, which met our expectations, along with the financially significant dollar value of identified non compliance of $14.4 billion that we addressed this past year, demonstrate our enhanced understanding of the risks associated with non-compliant behaviour.

Figure 10 Non-compliance addressed through our returns and reporting compliance activities Footnote 4

Data quality: Good

At the end of 2010-2011, total tax debt reached about $27 billion. Influences such as the residual effect of the recent economic slowdown and the adoption of the HST by the provinces of Ontario and British Columbia, appear to be among the factors that contributed to this increase. We are concerned about rising debt levels and, in response, applied new strategies to address debt inventories and to better balance our debt management workloads. As a consequence, we resolved 15% more tax debt in 2010-2011 than the previous year, bringing us back into line with levels of success from 2008-2009. In addition, we achieved good results in the percentage of intake to our Tax Services Offices that was resolved in the year of intake, reaching a rate of 64.4%. We consider these results as key indicators of our success in addressing payment non-compliance.

These accomplishments have led to our assessment that we have met our core business outcome.

Key volumetrics

Returns compliance – 722,487 returns were obtained from individuals and corporate taxpayers who had not filed their returns, 8,464 GST/HST non-registrants were identified resulting in $2.8 billion of identified non‑compliance.

Reporting – International and large business programs and the small and medium enterprise programs conducted 294,868 audits and examinations, resulting in a fiscal impact of $8.3 billion. Our other audits achieved a fiscal impact of $0.6 billion. 556,277 employer reviews and exams and 15,056 GST/HST examinations were conducted, achieving $1.6 billion of identified non-compliance.

Remittance – The TSO cash collections totalled $15.7 billion. We resolved over 93% of the dollar value of new TSO debt intake.

Our performance measurement framework – Making non‑compliance more difficult

Our indicators
Current target
2006-2007
2007-2008
2008-2009
2009-2010
2010-2011
Rating
Filing and Registering
Identified non-compliance for T1/T2 non-filers and GST/HST non-registrants ($ billion)
Upward trend
$2.4
$2.4
$2.4
$2.8
$2.8
Mostly Met
Reporting
Percentage of cases resulting in a change:
International and large business program
90%
92%
94%
95%
96%
93.7%
Met
Small and medium-sized enterprises
75%
80.2%
79.6%
80.9%
81.1%
80.3%
Met
– Underground economy
75%
80%
79%
78%
Met
Fiscal impact Table note 1
International and large business ($ billion)
$4.9
$5.7
$5.2
$6.4
Fiscal impact generated per audit FTE Table note 3 ($ million)
$2.7
$3.6
$4.0
$3.0
$3.5
$2.9
Met
Small and medium-sized enterprises ($ billion) Table note 4
$2.5
$2.1
$2.2
$2.1
$2.0
Fiscal impact generated per audit FTE ($ million)
$0.35
$0.44
$0.39
$0.39
$0.40
$0.39
Met
Other audits ($ million)
$556
$544
$545
$599
$626
Fiscal impact generated per audit FTE ($ million)
$0.39
$0.45
$0.45
$0.39
$0.40
$0.42
Met
Overall fiscal Impact ($ billion)
$7.9
$8.4
$8.0
$9.9
$8.9
Overall fiscal impact generated per audit FTE ($ million)
$0.9
$0.96
$1.04
$0.90
$1.15
$1.02
Met
Dollar value of other identified non-compliance
Identified non-compliance for Employer/payroll/GST/HST Trust Accounts ($ billion)
Upward trend
$2.4
n/a
$2.5
$1.6
Met
Remittance
Percentage of TSO intake resolved in the year of intake
60%
66.7%
60.4%
62.7%
54.6%
64.4%
Met
Dollar value of TSO production as a percentage of dollar value of TSO intake of new accounts receivable
90%
89.9%
82.6%
93%
95.5%
93%
Met
Dollar value of accounts receivable over five years old ($ billion)
<$3.5
$3.0
$2.6
$2.8
$2.9
$3.4
Met
Table note 1
Fiscal impact targets are used to measure overall performance of the CRA for planning purposes. Individual quotas are not assigned. Return to table note 1 source text
Table note 2
The two billion dollar increase over 2008-2009 is attributable to two audits which were unusually large in nature. Return to table note 2 source text
Table note 3
This includes all support staff, auditors, management, and executives who report to the audit functional area. Return to table note 3 source text
Table note 4
This includes the fiscal impact generated through our work in addressing the underground economy Return to table note 4 source text
Table note 5
GST/HST delinquent filer program results are not included. Production and identified value of non-compliance results were unavailable for the two most current periods. Return to table note 5 source text

Results against 2010-2011 planned deliverables

This past year, the CRA took steps to implement the initiatives listed below to make non-compliance with Canada’s tax laws more difficult. The tables also identify the status as of the end of the past fiscal year for each commitment related to these initiatives to be delivered in 2010-2011 as set out in our Corporate Business Plan 2010-2011 to 2012‑2013.

The status of a deliverable falls into one of three categories:

Completed – All planned activities related to the deliverable were finished on or before March 31, 2011.

In progress – At least one activity related to the deliverable was not completed prior to the end of the fiscal year.

Not started – No activities were begun by March 31, 2011, in relation to the deliverable.

Where no deliverables were to be completed during the 2010-2011 fiscal year for an initiative, we have inserted the abbreviation N/A (not applicable).

Initiative – Enhance strategies to manage payment non-compliance

Deliverables

Implement Phase II of the insolvency strategy
Status: In progress

Initiative – Identify aggressive tax planning schemes more effectively

Deliverables

Enhance our risk assessment and identification of high-risk international tax avoidance cases
Status: Completed

Initiative – Identify non-compliance in the underground economy more effectively

Deliverables

Expand our underground economy identification projects
Status: Completed

Evaluate the results of the initial phase of our Electronic Suppression of Sales Strategy
Status: In progress

Develop a suite of performance measures to assess the progress of our Underground Economy initiative
Status: In progress

Initiative – Use enhanced risk assessment to identify non-compliance by employers and GST/HST registrants

Deliverables

Develop a risk-based compliance framework for personal service corporations
Status: Not Started

Initiative – Implement an enhanced tobacco stamping regime

Deliverables

Develop proposed regulatory amendments and stamping regime guidelines
Status: Completed

Establish stamp acquisition sites
Status: Completed

Implement new excise stamping regime if approved by Parliament
Status: Completed

Develop communication strategy including outreach activities
Status: Completed

Initiative – Enhance the administration of the SR&ED

Deliverables

Increase the program's scientific capacity and level of service to claimants
Status: Completed

Initiative – Use better risk assessment to detect and correct reporting non‑compliance

Deliverables

Evaluate our current compliance risk framework / strategies to optimize the file selection process
Status: In progress

Initiative – Improve the detection and deterrence of non-compliance in our Charities program

Deliverables

Identify and audit all known charities participating in tax shelter arrangements
Status: In progress

Continue the false receipting pilot project
Status: Completed

Identify and audit all charities suspected of being involved in false receipting
Status: In progress

Target outreach and education to issues related to serious non-compliance schemes through Webinars, newsletters, awareness campaigns, etc.
Status: Completed

Implement a tool set for CRA employees to deliver CRA's mandate under the Charities Registration (Security Information) Act
Status: In progress

Footnote 1
The threshold level GST/HST audits of medium-sized business are registrants with revenues of between one million and $100 million. Return to Footnote 1 source text
Footnote 2
The figure for 2010-2011 is understated as results for the GST/HST Delinquent Filer Program were not available to be included in the calculation. Return to Footnote 2 source text
Footnote 3
On August 26, 2011 the Province of British Columbia announced that it will return to the provincial sales tax. The transition period is expected to take a minimum of 18 months. During this period, the CRA will continue to administer the HST in British Columbia. Return to Footnote 3 source text
Footnote 4
The figure for 2010-2011 is understated as results for the GST/HST Delinquent Filer Program were not available to be included in the calculation. In addition, $1.023 billion of fiscal impact was withdrawn during 2010-2011 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. The value of identified non-compliance presented in the figure above may be reduced through opportunities for taxpayer redress and some of the value may be determined to be uncollectible. Return to Footnote 4 source text



Date modified:
2011-11-02