Tax Services

Expected Result - High levels of compliance are achieved and non-compliance is identified and addressed

Overall, our measures indicate that the majority of Canadian individuals and businesses continued to participate voluntarily in Canada's tax system and to meet their obligations in 2004-2005. Where individuals and businesses do not comply with our tax laws--whether intentionally or not--the CRA delivers a wide range of programs to help protect Canada's tax base and ensure that Canadians pay their required taxes. The CRA's robust set of checks and balances (see the table entitled Non-Compliance: Checks and Balances) include both preventive and detective controls, and an active collections program.

To provide us with a systematic approach to monitoring and measuring compliance, we completed the development of our Compliance Measurement Framework (CMF) and its supporting system in 2004-2005. The CMF will significantly enhance our knowledge of compliance behaviour. We will use the results of our compliance monitoring activity to increase awareness of the factors that influence compliance and the extent to which our current service and program strategies are achieving their compliance objectives. The October 2004 OECD Guidance Note, entitled Compliance Risk Management: Managing and Improving Tax Compliance, recognized the CRA's leadership role in developing such a framework.

Non-Compliance: Checks and Balances

Tax integrity is closely linked to the public's perception of our tax system. We monitor the public opinion environment because the magnitude and composition of non-compliance can be influenced by changes that are both internal and external to the CRA. Although it is not possible to establish a direct link between views expressed in public opinion research studies and actual compliance behaviour, understanding public perceptions can help us adjust the way we deal with and communicate to Canadians.

Among our sources of information is the CRA Annual Survey ¹ , which for 2004 found that 68% of respondents agreed with the following statement: “Given the opportunity, most people would hide income or overstate an expense or deduction to avoid paying tax.” This result represents an increase from 64% in 2003. In addition, three out of four respondents to this survey agreed with the following statement: “The CRA would not know about income received in cash unless you declare it” (76% in 2004, versus 66% in 2003). When the public was specifically asked about what the CRA should do about tax cheating, the vast majority of people believed the CRA should better inform Canadians about the penalties for tax cheating, with a smaller majority agreeing that the CRA should increase the use of audits and penalties. Although not a reflection of actual non-compliance levels, this information, coupled with the results of other research and surveys--such as a recent CROP survey ² that segmented and tracked Canadian society according to their values, motivations and behaviours--supports our view that the CRA needs to continue to pay close and long-term attention to flagrant non-compliers.

We have established a strategy for further strengthening compliance and tax integrity in both the short and the long term. In 2004, the CRA undertook a comprehensive, Agency-wide review of the risks facing tax administration in Canada. The review spanned all program areas, and involved identifying key areas of risk, as well as developing comprehensive strategies to address those risks. This review confirmed that our top risk areas are aggressive tax planning, the underground economy, GST/HST compliance, and non-filers/non-registrants and collections. We started implementing these strategies in 2004-2005 (see the section entitled, Context: Strategic Risks and Priorities).

Achieve overall high levels (over 90%) of filing, registration and remittance compliance by individuals, corporations, businesses and employers

Our measures and indicators for filing, registration and remittance compliance demonstrate continued, strong overall performance for 2004-2005 (see the table entitled, Estimated Compliance Rates and Indicators).

Although several of these results did not meet our expectations, our estimates show that participation in the tax system among individuals remains high. Close to 93% of the Canadian population over 18 years of age filed a return or paid on time for the 2003 tax year. These results are especially important given that individuals make up a large proportion of our client base.

Employers play a vital role in maintaining compliance among the large number of individual taxpayers--employers must make payroll deductions, remit amounts that are deemed “in trust for the Receiver General for Canada,” and report employment-related earnings to the government. Of the $305 billion in tax collected by the CRA in 2004-2005, 66%, or $200 billion, was from personal income tax paid by individuals. Of this amount, $171 billion, or 86%, was collected by some 1.5 million employers through source deductions. Although our estimates for 2004-2005 fall just short of our 90% target, remittance compliance among employers remains strong, with approximately 90% of the employer population meeting their obligations to withhold and remit payroll taxes.

Other forms of third-party reporting, such as various information slips, also play a vital role in maintaining compliance among the 24 million Canadian taxpayers.

Meet benchmark for number of returns and registrations secured through the Non-Filer Program

As the basis for establishing each filer's tax liability, a tax return is the first and most important step in the compliance process. Our Non-Filer Program is aimed at identifying high-risk cases based on danger of loss and assessment potential. Our Non-Registrant Program seeks to ensure that all those who are required to register for the GST/HST meet their obligations.

In 2004-2005, our Non-Filer Program generated 795,000 T1 and T2 returns from individuals and businesses that did not meet their filing requirements (see Figure 5), while our GST/HST Non-Registrant Program identified 4,123 non-registrants that did not comply with GST/HST legislation as required. This figure has increased from 4,050 in 2003-2004. The Non-Filer/Non-Registrant (NF/NR) Program also initiated legal action that led to the conviction of 1,232 taxpayers, resulting in more than $1.3 million in fines and seven prison sentences. The fiscal impact for the NF/NR Program is noted in Figure 16.

Figure 5 Number of Non-Filers Identified

Risk assessment processes to identify reporting non-compliance are effective

Our self-assessment system is based on complete and accurate voluntary reporting by our clients. This means reporting all taxable income and other information required under the law. It also means claiming only allowable expenses, deductions and credits in determining one's tax liability.

Overall, our measures and indicators indicate that reporting non-compliance is found only in a minority of the general population, although in total it is financially significant.

Of note, the random sample conducted as part of the Processing Review Program shows that the vast majority of claims by individuals for key deductions and credits not subject to third-party reporting is correct. Overall rates of non-compliance in this sector have been slowly increasing, however, over the past number of years (see Figure 6). Several initiatives are in progress to address this rise in the number of errors being made. We are conducting several studies involving client profile analysis as well as exploring new client education methodologies. It should be noted that indicators suggest the vast majority of errors made by clients result from non-deliberate acts, including mistakes in interpretation and mathematical errors. Increasing complexity of income tax legislation is viewed to be a contributing factor.

Figure 6 Estimated Rate of Individual Income Tax Non-Compliance

An area of higher risk relates to the financial reporting of self-employed individuals. Our studies show that 8.6% of this group are non-compliant in the amount of $5,000 or more in tax.

Similarly, random sample audits indicated that 8.5% of small and medium-sized corporations were non-compliant in the amount of $5,000 or more in tax.

In addition to indicators about specific client groups, we look at macro indicators of compliance (see Figure 7). For example, personal income reported to the CRA tracks favourably, relative to personal income estimated by Statistics Canada; and GST revenues track consistently with retail sales and personal expenditures on goods and services.

Figure 7 Macro Indicators of Compliance

Note: 1996 was selected as the base year for analysis, with a value of 100 assigned for each of the three factors. Changes in subsequent years are indicated in relation to the base year.

The need for effective processes to identify non-compliance is fundamental to managing tax compliance risk and ensuring that people pay their required taxes. We manage our approach to non-compliance through a range of different programs tailored to the characteristics of specific client groups. Depending on the nature of the non-compliance, our approach may involve outreach, review, enforcement or a combination of these elements.

The CRA processes tax returns with an automated review of the information reported, but the returns may be subject to further review at a later date under our post-assessment programs. Since we must work within established budgetary limits, we depend on risk assessment systems to target the largest share of our compliance resources to areas of high risk. The aim is to administer the tax system more effectively, recover the appropriate amount of tax, and impose a smaller burden on compliant taxpayers. This approach complements the robust checks and balances listed in the table entitled, Non-Compliance: Checks and Balances.

When we find errors early during processing, we can recover funds owed to the Crown at a lower cost than that of undertaking enforcement actions later on in the process. As a result, once tax returns are filed, the CRA conducts pre-assessment reviews based on a risk scoring approach to select returns for detailed review. Through these reviews, we assess significant additional amounts every year, including an additional $86 million in taxes during the past fiscal year (see Figure 8).

Figure 8 Taxes Assessed through Pre-Assessment Reviews

Note: Due to the time required to produce and validate our data, the results reported from this program are always one year behind. In addition, due to certain field review coverage requirements and other issues concerning shifting field review priorities, some variations from year to year are expected.

The post-assessment reviews of key credit and deduction items involve both targeted reviews based on risk assessment as well as random reviews. The random reviews facilitate both an estimation of the non-compliance rate for these deductions and credits as well as ongoing refinement of risk assessment rules. The success of our risk assessment approach at this stage is demonstrated by average targeted recoveries exceeding random recoveries by a ratio of about 3.4 to 1.

Post assessment reviews also include the income matching program which involves comparing income reported by third parties on information slips to income amounts reported on individual returns. The post assessment review of key deductions and credits combined with the review of income for inaccurate reporting generated tax assessments exceeding $600 million relative to the 2004-2005 program (see Figure 9).

Our matching process was redesigned prior to the 2003-2004 fiscal period. Unanticipated system issues resulted in a decrease of over $180 million in tax assessments from 2002-2003. Our redesign is now complete, however, and plans are in place to make up for the lost revenues.

Figure 9 Individual Income Matching and Processing Review Program Results

The CRA has developed risk assessment systems that are used to provide a preliminary assessment of compliance. Tax returns or accounts with characteristics indicating the possibility of non-compliance are flagged, and their relative risk is used to help prioritize further compliance actions. The risk assessment systems are supplemented by the knowledge and experience of compliance specialists in order to make a final selection of accounts for compliance action, such as an audit. The estimated percentage of tax accounts deemed to be at substantive risk of non-compliance remained relatively constant for GST/HST accounts in 2004-2005. The estimated percentage for self-employed individual accounts steadily increased over the past four years (see Figure 10).

Figure 10 Estimated Percentage of Business Accounts Deemed to be at Substantive Risk of Non-Compliance

Note: The percentages identified are not a reflection of non-compliance for these sectors. Rather, they represent the percentage of accounts having possible tax at risk, with respect to reporting compliance.

One way we evaluate the success of our risk assessment processes is by comparing the results of our targeted audits, with the results of random audits. In 2004-2005, we developed baseline measures of non-compliance from our Core Audit program. This program used statistical methods to select a random sample of small and medium-sized enterprises (SMEs) in order to estimate reliable compliance rates. These measures were estimated separately for self-employed and corporate tax filers, as well as for GST accounts.

Figure 11 compares the percentage of audits revealing non-compliance of $5,000 or more from the Core Audit program, with the results of targeted compliance audits from our SME audit program in 2004-2005. The substantial difference noted with the targeted programs, which range from factors of about three to six times as effective, indicates that our risk assessment processes are working.

Figure 11 Non-Compliance Identification: Comparison of Core Audits to Targeted Audits

We are also working to identify increased cases of possible GST/HST non-compliance through the profiling of high-risk registrants, informant leads, partnerships with other law enforcement agencies, and audits and investigations.

Large multinational corporations that maximize their profits through tax avoidance and by obtaining tax rebates are a major component of our international workload. We address these risks by focusing on industry-specific issues; offshore transactions; valuation of intangible assets; loans and financing; and the restructuring of entity operations to push profits out of Canada. In 2004-2005, we assessed approximately $1.2 billion in additional tax (comprised of federal tax, penalties, interest and provincial/territorial tax) from adjustments to international transactions.

For those involved in repeat or deliberate non-compliance, the CRA enforces criminal sanctions that are intended to ensure compliance by deterring fraudulent behaviour. In addition to Non-Filer/Non-Registrant prosecution results, this year, 243 income tax and GST/HST investigations (including 28 GST cases by the Ministère du Revenu du Québec) were referred to the Department of Justice Canada for prosecution. These and previous years' referrals resulted in convictions for tax evasion or fraud in 250 cases, including 39 in Quebec courts, in 2004-2005. In all provinces/territories, courts imposed close to $13.3 million in fines and more than 26 years of prison sentences. The convictions related to a revenue loss of $14.3 million. We obtained convictions in 97% of the cases prosecuted (see Figure 12), demonstrating the effectiveness of our risk approach to the identification and prosecution of cases of wilful non-compliance and fraud.

Figure 12 Conviction Rates

As part of our Special Enforcement Program, in 2004-2005, we conducted 1,196 audits of clients suspected of earning income from the illegal economy. The audits identified close to $75 million in additional tax owing (see Figure 13).

Figure 13 Results from Special Enforcement Program

Meet audit coverage level commitments to the Government of Canada

We audit all types of tax returns. Our audit coverage rates vary depending on the risk and the taxpayer population being considered.

Starting in 2001-2002, additional funding from Treasury Board allowed us to gradually increase the number of audits we complete each year; audit coverage rates were established on the basis of the population at that time. Although we met all of our internal targets (with the exception of the small and medium-sized business sector), which were based on available funding, we did not meet our audit coverage rate commitments for 2004-2005 (see Figure 14 and Figure 15). The reason, in part, is because of changes in population, which were not considered when the funding was originally approved. We recognize the need to redefine our commitments to the Government of Canada, based on available funding, population sizes and risk management.

Figure 14 Audit Coverage Rates--Large Business

Figure 15 Audit Coverage Rates--Small and Medium-Sized Business and GST/HST Files

Identify issues and make recommendations to the Department of Finance Canada for legislative changes

In 2004-2005, we joined with the Department of Finance Canada in various negotiations involving tax treaties. In response to a recommendation from the 23^rd Report of the Standing Committee on Public Accounts in June 2003, we report that Canada has 83 tax treaties concluded by the Department of Finance Canada and currently in force. Another six treaties have been signed but are not yet in force, while 17 are under negotiation or renegotiation. We have also signed a Memorandum Of Understanding with the tax commissioners of Australia, the United Kingdom, and the United States to establish the Joint International Tax Shelter Information Centre (JITSIC) to deter the promotion of, and investment in, abusive tax schemes. In the cases involving the use of offshore tax planning arrangements that are currently under review, the amount of tax at risk is estimated at $658 million. In addition, the most recent figures show that approximately $4.4 billion in tax was paid by non-residents of Canada on income earned from Canadian contract services, investments, pensions, disposition of taxable Canadian property and other sources of taxable income in Canada.

In 2004-2005, we established the necessary infrastructure and partnerships for advancing charities reform to improve the legislative and regulatory environment in which the charitable sector operates. Further, 69 recommendations made by the Joint Regulatory Table were accepted in full or in part by the Department of Finance Canada and were reflected in the federal budget speech of March 2004. Each supported or partially accepted recommendation has been captured within the context of a five-year regulatory reform action plan.

Participate in meaningful discussions with domestic and international associations and committees to address the risk of non-compliance in areas such as e-commerce and tax havens

We rely on strategic partnerships with tax treaty partners to solve common problems and identify best practices. The CRA plays a significant leadership role in various international organizations and associations, such as the Pacific Association of Tax Administrators. We have also been actively participating in OECD initiatives to improve the reliability of accounting software and electronic point of sale systems. Through co-operation between tax authorities, software developers, businesses and public accountants, the following documents were developed and posted on the OECD website: Guidance on Tax Compliance for Business and Accounting Software Developers and Guidance on Standard Audit File (Income and GST/VAT Taxes).

Meet anticipated fiscal impact levels of our compliance programs

In 2004-2005, our programs to address non-compliance identified a total fiscal impact of close to $10.2 billion (see Figure 16). These results exceeded our commitment of $8.7 billion to the Government of Canada by 17%, and are similar to our fiscal impact results in prior years. We recognize that a portion of our fiscal impact results will be subject to appeals and/or will be uncollectible.

These results also include $1.2 billion in outstanding payroll taxes assessed by the CRA in 2004-2005. Although this total represents a decrease of 5.3% compared with 2003-2004, the number of accounts reviewed and examined has increased year over year. The resulting average dollar amounts assessed per review have declined.

Our fiscal impact totals also include results in addressing the underground economy through the Contract Payment Reporting System, where results exceeded our commitment to the Government of Canada in 2004-2005: 33,050 additional individual and corporate tax returns were filed, totalling more than $233 million in federal and provincial/territorial assessments and registered or reactivated 565 GST/HST accounts.

Figure 16 Total Gross Fiscal Impact of 2004-2005 Tax Compliance Activities

Note: Total gross fiscal impact includes federal and provincial/territorial tax (participating provinces/territories only), federal tax refunds offset or reduced, interest and penalties, and present value of future tax assessable, where appropriate.

* Other Audit Programs include Tax Avoidance, International Tax Programs, Tax Incentives and Investigations.

¹ See the footnote on for further information regarding the CRA's Annual Survey.

² Compliance, Tax Evasion and Social Change in Canada in 2003--3SC 2003 Final Report, Crop Marketing Research Opinion Survey.

Date modified:

2005-10-26