Our 2005-2006 Results

Our Program Activities

Reporting Compliance (PA4)

Our Reporting Compliance program activity is comprised of a mix of audit and enforcement activities (examinations, reviews, audits, and investigations) to ensure compliance with federal, provincial, and territorial income tax and GST/HST laws.

In 2005-2006, spending for this program activity totalled $1.1 billion (12,489 FTEs) or 30.2% of the CRA's overall expenditures ¹ . Of this $1.1 billion, $815.9 million was for net program expenditures and $304.9 million was allocated to this program activity for Corporate Services.

Figure 26 Resource Spending

• Audit Programs – carries out audits of individuals and businesses, international tax, and tax avoidance:
  • spending of $690 million (8,286 FTEs);
  • 388,235 reviews, examinations and audits completed.
• Enforcement Programs – our investigations program area investigates suspected cases of tax evasion and fraud, pursues criminal prosecutions, and publicizes successful prosecutions of tax law offenders. Our Special Enforcement Program helps combat organized crime by conducting audits and civil enforcement actions on individuals known or suspected of deriving income from illegal activities:
  • spending of $79.4 million (860 FTEs);
  • 252 income tax and GST/HST investigations were referred to the Department of Justice for prosecution;
  • $14.4 million in fines were imposed;
  • conviction rate of 94%; and
  • as part of the Special Enforcement Program, we conducted 1,349 audits and identified more than $80 million in additional tax owing.
• Functional Direction – re-engineers related business processes for the CRA; conducts research and analysis of compliance behaviour and trends; assesses compliance risk, and develops tools for use in audits and investigations; and provides financial planning and management support services for PA4:
  • spending of $46.6 million (415 FTEs).
• Allocation of Corporate Services spending
  • total of $304.9 million allocated to this program activity (2,927 FTEs).

Performance Report Card

Performance Discussion

Our Reporting Compliance program activity has one expected result: Non-compliance is identified and addressed ² .

We have met our expected result by meeting our expectations related to the following key indicators:

• we continued to improve our knowledge and enhance other aspects of our risk assessment approach;
• our Core Audit Program results demonstrated our effectiveness in targeting cases of highest risk;
• $5.5 billion in fiscal impact was identified by our Reporting Compliance program activity, exceeding our expectations;
• our investigations work led to convictions in 94% of cases referred for prosecution. The courts imposed $14.4 million in fines and more than 33 years in prison for cases of tax evasion and tax fraud;
• progress that met our expectations was made in the areas of aggressive tax planning, the underground economy, and GST/HST fraud; and,
• our Special Enforcement Program continued to address non-compliance by those suspected of participating in illegal activities, identifying more than $80 million in additional tax owing.

While we met our internal targets, except in the case of small and medium corporate files, we did not meet our five audit coverage rate commitments to Parliament.

The results achieved within this program activity contribute to our tax services strategic outcome by helping to protect Canada's revenue base by identifying, addressing, and deterring taxpayer non-compliance.

Enhanced Risk Assessment – In 2005-2006, we continued work on the compliance risks—aggressive tax planning, the underground economy, and GST/HST fraud—identified under the tax integrity priority in our Corporate Business Plan 2005-2006 to 2007-2008. Results related to these risks are discussed beginning on .

We are increasing our research and analysis to improve our knowledge about the underground economy and to enhance our intelligence-gathering capacity. This includes developing cross-program compliance profiles for all taxpayers to assist in better selection of files for audit or review.

Core Audit Program – Our Core Audit Program uses statistical methods to select a random sample of tax files for auditing to estimate a reliable compliance rate among small and medium enterprises (SMEs). The program also generates information for validating and refining the risk criteria that are used in our risk assessment system.

Figure 27 shows the rate of non-compliance estimated from the randomly selected audits of the SME GST/HST wholesale trade sector that revealed non-compliance of $5,000 or more, and compares it to results of targeted compliance audits from our SME audit program in 2005-2006. The improvement ratio is the rate at which targeted audits are more effective than random selection for identifying non-compliance. In this case, targeted audits are 3.8 times more effective at identifying non-compliance than is random selection. This demonstrates the effectiveness of our risk assessment processes.

Figure 27 Core Audit Program – Rates of Non-Compliance

Audit Coverage Rates – Part of our risk management approach is to maintain an audit presence across all industry sectors and types of taxpayers. This deters non-compliance by increasing the credibility and visibility of our compliance programs.

In 2001—along with the additional funding from Parliament we were granted to manage the growing level of tax debt—we obtained resources to gradually increase the number of audits we complete each year. Audit coverage commitments were made based on sector populations at that time. Although we met all of our internal targets for audit coverage for 2005-2006 (with the exception of the small and medium-sized corporate files), which were based on available funding, we did not meet our audit coverage rate commitments for 2005-2006 (Figure 28 and Figure 29). This is because of changes in population, which were not considered when the funding was originally approved. Since this is the final year of these commitments, we will gauge our future audit coverage rate achievements based solely on internal targets.

Figure 28 Audit Coverage Rates – Large Business

Figure 29 Audit Coverage Rates – Small and Medium-Sized Enterprises and GST/HST Files

Fiscal Impact – In 2005-2006, our Reporting Compliance program activity identified $5.5 billion in fiscal impact (Figure 30), which exceeded our estimate of $5.4 billion. Tax assessments that make up this fiscal impact are subject to appeal; some assessments may thus be overturned. A portion of this fiscal impact also may be uncollectible.

Figure 30 Total Gross Fiscal Impact of 2005-2006 Reporting 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.

International Partnerships – Our approach to compliance is informed through cooperation with other tax administrations, and international organizations such as the Organization for Economic Co-operation and Development (OECD) and the Inter-American Center of Tax Administrations (CIAT). Such collaboration allows us to share expertise and research results, and to discuss emerging compliance issues with a variety of jurisdictions.

In May 2005, Canada was host to nine tax administrations that attended the Tax Compliance Program Management and Evaluation Workshop. The workshop resulted in an agreement to continue working together and exchanging knowledge and experience to further the goal of developing internationally comparable compliance measurement data. Harmonization of compliance measurement methods also remains a long-term goal.

We also rely on strategic partnerships with tax treaty partners to solve common reporting compliance problems and identify best practices. 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 86 tax treaties concluded by the Department of Finance Canada and currently in force; three treaties have been signed but are not yet in force; and 19 are under negotiation or renegotiation.

Prosecution – For those involved in tax evasion or tax fraud, the CRA enforces criminal sanctions that are intended to ensure compliance by deterring fraudulent behaviour. In 2005-2006, 252 income tax and GST/HST investigations (including 30 GST cases by the ministère du Revenu du Québec) were referred to the Department of Justice Canada for prosecution. These and referrals from previous years resulted in convictions for tax evasion or fraud in 293 cases in 2005-2006 (including 39 cases in Quebec courts) that resulted in the loss of $13.4 million in tax revenue. Courts across Canada imposed close to $14.4 million in fines and sentenced offenders to more than 33 years in prison. We obtained convictions in 94% of the cases prosecuted (Figure 31).

Figure 31 Conviction Rates

Implementation of Tax Integrity Priority Initiatives – We implemented all initiatives planned for this past year in connection with our Tax Integrity priority (introduced on ).

Aggressive Tax Planning – In 2005-2006, we:

• created 11 Centres of Expertise across Canada, bringing together audit professionals from areas such as international tax, special audits, and tax avoidance, to create teams of experts to provide a more coordinated approach in addressing aggressive international tax planning;
• identified a champion for each Centre of Expertise to ensure that the work of the Joint International Tax Shelter Information Centre is best used in the field; and
• created a Taxpayer Alert page on our Web site that provides taxpayers with information on a wide range of topics aimed at educating the public about inappropriate schemes and deterring non-compliance.

Underground Economy – To address the underground economy (UE) in 2005-2006, we:

• created seven pilot projects using integrated audit teams comprised of specialists from different parts of the CRA to develop innovative approaches to address UE issues;
• publicized enforcement actions; and
• continued research on expanding the use of third-party reporting and use of third-party information, such as from large businesses, hospitals, schools, other governments, and other government departments.

GST/HST Fraud – Further to the discussion concerning this subject on , our GST/HST compliance strategy is to prevent improper GST/HST refunds and create a legislative and administrative environment that reduces opportunities for fraud. We achieve this through a number of means, including identifying high-risk businesses before and at the time of refund claims, improving risk assessment for registration and prepayment audit process, and recommending legislative changes.

A number of projects were begun or continued to strengthen High Risk Audit Teams and pre-payment audit. We are studying compliance rates among credit returns to estimate the value of overpayments; reviewing audit selection criteria to improve focus on high- risk files; and conducting other studies and pilot projects to improve prevention and detection of
GST/HST overpayment and fraud.

Special Enforcement Program – In 2005-2006, we conducted 1,349 audits of taxpayers suspected of earning income from the illegal economy. The audits identified more than $80 million in additional tax owing (Figure 32).

Figure 32 Results from Special Enforcement Program

Note: Prior year figures for this program have been re-stated to eliminate double counting of TEBA amounts for files referred to the Criminal Investigations Program. The reduced amounts are $4.6 million for 2002-2003, $7.3 million for 2003-2004, and $8.3 million for 2004-2005.

¹ Spending and FTE figures for sub-activities may not add up to this total due to rounding.

² This expected result has been updated from that published in our 2005-2006 to 2007-2008 Corporate Business Plan. As noted in the Plan, this expected result was under review; our review concluded that the revised wording for this program activity was a better reflection of its desired outcome.

Unaudited

Date modified:

2006-11-23