1989 Report of the Auditor General of Canada

Main Points

19.1 Millions of dollars in additional revenues could be collected if National Revenue - Taxation were to expand its payroll and non-resident audit coverage further. This is demonstrated by the fact that increases in audit coverage since 1984-85 have resulted in substantial increases in source deductions assessed and in the amount of unreported income discovered (paragraphs 19.37 to 19.44).

19.2 Delays in the receipt and deposit of revenues due to National Revenue - Taxation's processing procedures have been reduced following interim changes made by the Department in 1988. These delays were highlighted in a 1986 study commissioned by the Office of the Comptroller General and were estimated by us to cost roughly $24 million annually. Final measures instituted in early 1989 to speed the deposit of cash received through district offices should further reduce or eliminate this cost (19.20 to 19.22).

19.3 Productivity levels differ in taxation centres for similar activities. The differences result from a variety of factors, many of which can be influenced by departmental management alone or in concert with the central agencies. Analysis of these activities would likely reveal opportunities for efficiency enhancement (19.71 to 19.78).

19.4 In the event of a disaster, National Revenue - Taxation does not have an adequate plan for continuing operations on an interim basis while the computer system is being restored (19.32 to 19.34).

19.5 Problems that we have reported on two previous occasions (1985 and 1987) concerning the growth of the Canada Pension Plan unidentified earnings file have not yet been resolved. The value of items in the file has now reached $108 million. If contributors do not receive credit for these contributions, their pensions will be lower than they should be (19.60 to 19.63).

Introduction

19.6 The Department of National Revenue - Taxation collects four main categories of revenues: federal income taxes, provincial and territorial income taxes where determined by agreement, employer and employee contributions to the Canada Pension Plan, and employer and employee Unemployment Insurance premiums. The following table shows the amounts collected in the 1987-88 fiscal year.

	Gross Collections 1987-88
Federal Income Tax	$ 68,301,605,000
Provincial Income Tax	20,367,174,000
Canada Pension Plan Contributions	5,583,236,000
Unemployment Insurance Premiums	$ 10,670,769,000
Total Revenues	$ 104,922,784,000

(Source: Report of the Department of National Revenue - Taxation for the fiscal year ended 31 March 1988)

19.7 Source deductions. When Canadians file their income tax returns each spring, they have often paid all or part of their taxes, Canada Pension Plan contributions, and Unemployment Insurance premiums through deductions made by their employers from their incomes. Employers remit these funds to the Department of National Revenue - Taxation at least once a month. All such remittances are recorded on computer files. Later they are allocated to the appropriate individual taxpayers' records, which are also maintained on computer files.

Number of taxpayers with source deductions in 1987	13,418,133
Number of active employer accounts with the Department of National Revenue - Taxation at 31 March 1988	1,233,727
Total source deductions for the fiscal year ended 31 March 1988	$ 76,662,720,000

19.8 Instalment payments. Some types of income are not subject to deductions at source, including alimony and maintenance payments, certain tips and gratuities, interest, dividends, rental and investment income, self-employment income, and some pension payments.

19.9 Most individuals are required to make quarterly instalment payments of income tax unless tax is deducted at source from at least three-quarters of their net income, or their net federal tax payable for the current or preceding year does not exceed $1,000. Farmers and fishermen whose tax for each of the current and preceding years is more than $1,000 pay instalments on a different schedule than other individuals.

19.10 Corporations remit income tax in monthly instalments.

19.11 Payments on filing. When individual taxpayers file their income tax returns, many will have a balance owing. They are required to remit the balance by 30 April. Corporate taxpayers are required to remit balances owing two or three months after their fiscal year end, depending on the type of corporation.

19.12 Non-residents. Individuals who are not resident in Canada must pay non-resident tax on certain income from Canadian sources. This tax is required to be withheld at source.

Source Deductions and Revenue Programs Activities

19.13 Receipt, deposit, and accounting for revenues. Revenues are received in financial institutions, taxation centres, and, increasingly, in district offices. They are deposited to the credit of the Receiver General for Canada in various financial institutions and subsequently transferred to the Bank of Canada. Within National Revenue -Taxation they are accounted for in a number of computerized systems.

19.14 Inquiries and correspondence. District office staff provide information and answer general questions pertaining to source deductions. Taxation centres are responsible for answering correspondence concerning employers' and taxpayers' accounts.

19.15 Audit and enforcement. The Department monitors amounts received from employers, to identify those who have not deducted or remitted as required. It contacts delinquent employers to request payment and, if necessary, audits their records and issues assessments for the amounts due. It may also audit employers to uncover unreported employment income and taxable benefits given to employees, or to verify deductions of Canada Pension Plan contributions and Unemployment Insurance premiums from pensionable and insurable earnings. The source deductions program also conducts audits of payments made to non-residents to uncover those that are subject to non-resident tax.

19.16 Canada Pension Plan and Unemployment Insurance. The Minister of National Revenue - Taxation is responsible for administering certain aspects of both the Canada Pension Plan (CPP) and the Unemployment Insurance Program (UI). The Department of National Revenue - Taxation collects contributions, premiums and benefit repayments, gathers certain information, and issues rulings on the application of certain provisions of the relevant legislation. Amounts collected and information gathered are transferred to the departments with primary responsibility for CPP and UI administration.

Audit Scope

19.17 We defined our scope to be the activities under the functional direction of the Source Deductions and Revenue Programs Divisions which, together with the Collections Division, make up the Head Office Collections and Accounting Directorate. The Collections Division was the focus of a chapter in our 1988 Report. The responsibility for operations lies with the five regional offices -- and the 37 district offices and seven taxation centres that report to them. We carried out our audit of the operations in a sample of two regional offices, seven district offices, and four taxation centres across Canada. In our view this sample represented a reasonable cross section of the Department.

19.18 Source Deductions and Revenue Programs are supported by certain computer applications operated by the Head Office Information Systems Directorate. We examined these applications.

19.19 Some of the activities included in our scope had been examined by the Department's internal auditors within the last three years. We reviewed the internal audit reports and followed up some of the findings in the course of our audit.

Revenue Programs

Cash Management

19.20 Given the enormous volume of receipts that National Revenue - Taxation handles, it is important that processing at all stages be done efficiently to minimize the associated financing costs. Amounts received by National Revenue - Taxation, but not yet deposited to the credit of the Receiver General for Canada with the Bank of Canada, are referred to as the "float". The term "financing cost" is used in relation to the amount of this float. Until amounts have been deposited to the credit of the Receiver General for Canada, the government does not have use of the funds. We assume that the government would have reduced the amount of its borrowing by the amount of these funds. The term "financing cost", therefore, refers to the interest payable on an amount of borrowing equal to the amount of the float.

The processing of remittances made to district offices is more efficient

19.21 Until very recently the Department's deposit-making function was concentrated in the taxation centres. Amounts received by district offices were forwarded to the nearest taxation centre for deposit. Statistics developed by National Revenue - Taxation show that it took an average of three days for the receipts to travel from a district office to a taxation centre. Since district office remittances averaged $80 million a day, this created a float equal to three times that amount, or $240 million. The annual financing cost of carrying the float would be $24 million at an assumed interest rate of 10 percent.

19.22 A study dated October 1986 commissioned by the Office of the Comptroller General highlighted this delay. As an interim measure, district offices began in June 1988 to deposit cheques having a large value, thus reducing the financing cost by half. The study also became the impetus for National Revenue - Taxation's "District Office Cash Project". Under procedures implemented in early 1989, district offices themselves make deposits of all amounts they receive. This should greatly reduce or eliminate the former delay.

Processing of payments included with tax returns has improved substantially in 1989

19.23 Individual taxpayers having a balance of income tax owing tend to delay filing their returns until the 30 April deadline. This creates a peak workload for National Revenue - Taxation as returns with payments enclosed flood in during the early days of May each year.

(Photos not available)

19.24 In 1988, it took until 27 May for the Department to deposit all these payments. It estimated the financing cost of the delay in depositing to be about $3.4 million.

19.25 In October 1988, the Department set out to develop strategies that would enable it to clear the backlog of payments on filing more quickly. The target for 1989 was to clear the backlog by 19 May at the latest. This was expected to reduce the financing cost to $2.3 million, an improvement of $1.1 million. All taxation centres met the target, and one taxation centre was able to clear the backlog by 9 May 1989. The Department plans to review and evaluate the methods used to achieve this performance.

Delays in depositing certain receipts result in failure to comply with legislative requirements

19.26 Regulations made pursuant to the Financial Administration Act require the deposit of amounts received each day, unless the total is less than $500. Paragraphs 21 to 25 indicate that National Revenue - Taxation has not always complied with this requirement. The Department believes the legislative requirements cannot be achieved as they apply to payments on filing.

The Department does not have the information necessary to determine whether the processing of remittances through "indirect clearers" is cost-effective

19.27 Employers may deliver the amounts they have withheld from employees, together with their own contributions and premiums, to any financial institution. Individuals and corporations may make their income tax instalment payments in the same way. Some financial institutions, called "direct clearers", have agreements with the Receiver General for Canada under which they charge for each remittance they process and pay interest on amounts they have received but have not yet credited to the Receiver General. Other financial institutions, called "indirect clearers", receive no service charges and pay no interest.

19.28 Indirect clearers typically use the mail to transfer to National Revenue - Taxation the amounts they have collected. Statistics developed by National Revenue - Taxation for the period from September 1988 to March 1989 show that the average difference between the date remittances were received by a financial institution and the date they were received by the Department varied from 7.59 to 8.98 days. The overall average was 8.16.

19.29 The average daily amount of remittances transferred by indirect clearers through the mail during this period was approximately $1.3 million. The annual financing cost of carrying a float equal to eight days' remittances is $1.0 million at an assumed interest rate of 10 percent. The Department does not know the value of service charges that would be required to pay indirect clearers on the same basis as direct clearers. Consequently it is unable to assess the cost-effectiveness of processing through indirect clearers. Late in 1988 information to perform the analysis started to become available and when sufficient data are available the Department of Supply and Services will proceed with a cost-benefit analysis.

Cash Receipts and Accounting Systems

19.30 The cash receipts and accounting systems at National Revenue - Taxation consist of both manual and computerized processes. Transactions are initially recorded in the Financial Information Processing System, which sorts the transactions and channels them into other subsidiary systems and the Department's general ledger. Subsidiary systems include those that maintain individual taxpayer accounts, corporate taxpayer accounts and payroll deduction accounts.

19.31 In view of the amounts of revenue that the Department handles, it is essential that there be a sound system of internal controls over cash receipts to protect against loss through fraud or error. We reviewed documentation and made inquiries concerning certain key internal controls and found no evidence of significant deficiencies. However, we did not test the controls to determine whether they were functioning as intended. The Department's internal auditors periodically test the procedures performed at each taxation centre.

The Department has not made adequate arrangements for recovery of its cash receipts accounting systems in the event of a disaster

19.32 The Department is vitally dependent on its computerized systems. A 1987 internal audit report stated that it did not have an adequate disaster recovery plan. In response to this criticism, the Department has taken some initial steps. A back-up site has been prepared in the Sudbury Taxation Centre to receive computer and telecommunications equipment when required. The area is equipped with the appropriate electrical, air conditioning and fire extinguishing systems while it continues to be used for clerical operations. The Department estimates that it would take about 60 days to get the back-up site operating.

19.33 The disaster recovery plan assumes that the data available in off-site storage will be adequate as a basis for recovery. At the time of our audit, we found that there were not adequate data available off-site. However, the Department has informed us that it has now corrected the situation. We also noted that, except for procedures for manual preparation of deposits, the Department has no plan for operating during the period that it would take to get the back-up site operating.

19.34 The Department should include in its disaster recovery plan a strategy for operating from the time a disaster occurs until the back-up computer site is ready for use. It should also periodically conduct tests to ensure that data maintained in off-site storage are adequate to effect a recovery.

Department's response: We agree and our EDP Systems and Technology Branch will be convening a Disaster Recovery Steering Committee and a Disaster Recovery Working Committee to address elements of the Disaster Recovery Plan such as the capability to operate following a major shutdown of the main system.

The Department's systems for performing interest calculations need revision

19.35 Income tax legislation establishes a variety of circumstances in which the Department either charges or pays interest. Responsibility for performing these calculations falls under Revenue Programs.

19.36 Calculation of interest can be very complex. For individual taxpayers, calculations are performed chiefly through the computer software system that maintains individual taxpayer accounts. This system, known as CINDAC, was developed about 25 years ago and has since undergone continuous amendment. As a result, it has become increasingly inefficient and expensive to maintain and modify. The difficulty with interest calculations is simply one consequence of using the software system in its present form. The Department has begun a process of completely rewriting the CINDAC system software over a period of five years with a view to improving its efficiency and capabilities. It plans to complete the segments of the system for performing interest calculations by 1991.

Source Deductions

Audit

19.37 The Source Deductions activity includes four types of audit; three of these are payroll audits and the fourth is non-resident audit. Each year a plan is developed for each type, with a target number of audits to be performed and an allocation of person years to be devoted to the task.

19.38 One of the payroll audits is known as an enforcement audit. It is initiated, for example, when National Revenue -Taxation's computer system identifies a potential problem with an employer such as an overdue payment. A second type, known as a service audit, is done after a receivership or bankruptcy where a proof of claim must be filed. The third type of payroll audit deals with unreported employment income or taxable benefits. This is known as a benefit and employment income audit (BEIA). In the fourth category, the non-resident audit, auditors look for taxable payments to non-residents.

The performance of the Source Deductions audit function has improved over the last five years

19.39 A dramatic improvement in the performance of the Source Deductions audit function occurred when the Department allocated more person-years to it. In the year ended 31 March 1985, the total number of audits performed was just over 54,000, some 20,000 fewer than the budgeted number of audits for the year. For the year ended 31 March 1989, the total number of audits performed had risen to over 82,000, only about 2,000 fewer than the amount budgeted for the year. All four types of audit showed increases, but enforcement audits -- with an increase of 17,000 -- and service audits -- with an increase of over 7,000 -- accounted for 85 percent of the improvement.

19.40 This expanded audit coverage has translated into an increase in the additional source deductions assessed of from about $145 million in 1984-85 to $319 million in 1988-89, and in the amount of unreported income discovered of from $35 million in 1984-85 to $82 million in 1988-89. Auditors are also managing to collect a higher proportion of the assessments at the time of their field visits.

19.41 Despite this generally improved performance, the Department has not met its own targets for "percentage coverage" of employer accounts (the proportion audited as a percentage of all accounts) or average age of audit inventory (accounts selected for audit but which have not yet been done). The BEIA and non-resident audits, while increasing in number, have still fallen short of the planned number of audits.

Mandatory workloads divert resources away from audit activities that could produce high returns

19.42 One of the techniques that National Revenue - Taxation uses to rank its assignment of resources involves designating activities as either mandatory or non-mandatory. All Source Deductions audits are non-mandatory, except for service audits. Responding to public inquiries is mandatory. When faced with a pressing mandatory requirement, a manager may shift resources out of a non-mandatory activity into one that is mandatory.

19.43 We noted a few recent instances where resources were temporarily withdrawn from the audit activity and moved elsewhere. Without suggesting that such cases are widespread, we raise the concern that this kind of choice could involve foregoing revenues, particularly where government-wide constraints on person-year resources combine with the Department's current priority of providing service to its clients.

19.44 Statistics show that an additional dollar spent on audit can provide a return of many times that amount. During 1988-89, enforcement and service audits generated revenue in the order of $765,000 and $395,000 per auditor respectively. A typical payroll auditor earned approximately $35,000 annually. It follows, therefore, that millions of dollars in additional revenue could be collected if the Department were to expand its payroll audit and non-resident audit coverage beyond the current level.

19.45 The Department indicated to us that it has recently set up a committee to consider the competing objectives of compliance and service to the public, both of which play a part in its designation of activities as mandatory or non-mandatory.

Enforcement

19.46 The term "enforcement" refers to a variety of follow-up activities on items such as missing remittances of source deductions, missing T4 returns, and discrepancies between amounts received and amounts reported on T4 returns. Enforcement activity is conducted entirely through correspondence and telephone contact, and is computer-generated. If this is unsuccessful in resolving the problem, the case is referred to audit.

(Exhibit 19.1 not available)

The decision to change a tolerance level was made without the aid of a formal cost-benefit analysis

19.47 To control enforcement workload, "tolerance levels" or cut-off points are established. The computer identifies a problem condition in a particular item, then compares some attribute of the item against the relevant tolerance level. If the value of the attribute is above the tolerance level, enforcement action will be taken, otherwise the problem condition will be ignored.

19.48 The Department recently raised one of its tolerance levels to decrease the workload by 20 percent in that activity; labour hours are also expected to decline. This affects the same activity from which most of the staff resources were taken to handle the rapidly expanding public inquiries function. This is another example of resources being moved from a non-mandatory activity to a mandatory activity.

19.49 In deciding to raise the tolerance level, the Department estimated the amount of resources that would be freed, and reasoned that no significant monetary loss would occur. No formal cost-benefit analysis was done to support the decision. While we do not question the Department's decision, we believe it would be preferable to support such changes with a formal cost-benefit analysis.

The Department's desired levels of voluntary compliance have not been achieved

19.50 Accounts that require some sort of enforcement or audit activity involving personal contact are known as "district office responsibility" (DOR). The Department uses the percentage of accounts that are DOR as one measure of the level of voluntary compliance by employers, setting the goal that not more than 4 percent of accounts should be DOR. Over the past five years, the percentage has often gone over this 4 percent target. In March 1989 it varied from 2.2 percent to 10.6 percent among the district offices, with an average of 4.9 percent. The Department has informed us it will be reviewing the appropriateness of the 4 percent target level and will be seeking to improve the consistency in results.

Inquiries

19.51 In January 1988, responsibility for answering inquiries relating to matters handled by Source Deductions units was transferred from the general inquiries function to the Source Deductions units. It was felt that these inquiries could be handled more effectively by respondents who had greater familiarity with the subject. The change followed two studies by the Department in which concern had been expressed about the quality of information and level of service being provided to callers.

The Department did not accurately estimate the resources required to implement its decision to relocate the Source Deductions inquiries function

19.52 The cost analysis performed considered only the one-time capital cost of supplying telephone stations and the ongoing telecommunications costs. Before the decision, the number of person-years to be transferred from general inquiries to Source Deductions to accommodate the change was not determined. When this was calculated, it was based on historical information, and did not account for certain government initiatives that would cause an increased volume of inquiries. The plan called for 30 person-years to be transferred; in fact a total of 131 person-years was required to handle the volume of calls.

19.53 The Department believes that the quality of responses to inquiries concerning source deductions has improved. However, this cannot be verified because it did not collect the data before and after the transfer which would be necessary to measure improvement. It samples the types of inquiries being handled and plans to do a comprehensive survey of responses to monitor their quality.

The Department cannot in all locations monitor achievement of its level of service targets for Source Deductions inquiries

19.54 The Department has established a level of service standard for telephone enquiries. It requires that no more than 30 percent of callers will hear a busy signal. However, the majority of district offices do not have the equipment to monitor the level of service obtained. A review of the level of service provided through toll-free (1-800) numbers during the period January to April 1989 revealed that 14 offices consistently met the standard, eight sometimes failed to meet the standard, while two consistently failed to meet it. Overall, the standard was not met 28 percent of the time.

19.55 The Department should ensure that district offices have adequate data sources available to permit monitoring of performance standards for the Source Deductions inquiries function.

Department's response: We agree and have taken steps to acquire the necessary equipment beginning in this fiscal year.

Accelerated Remittances

The Department has successfully implemented the government policy decision to accelerate source deduction remittances

19.56 Effective January 1988, larger employers who pay their employees at least twice a month must remit source deductions twice a month rather than once. This requirement affects roughly 47,000 employers who, although they make up only 4 percent of the total number of employers, account for about 79 percent of all source deductions collected. The purpose of the change was to improve the government's cash flow, estimating that the effect would be a one-time reduction of about $1.2 billion in the government's annual deficit.

19.57 Cut-off points at which employers would be subject to the new requirement were chosen to minimize the compliance burden on small employers and the administrative burden on National Revenue - Taxation.

19.58 The impetus for the change came from the Department of Finance; National Revenue - Taxation's role was one of implementation. The Department set up a task force to plan and manage the implementation of the change, including a communication program, design of forms, changes to internal systems, and training. It also prepared a contingency plan to cover possible problems or delays.

19.59 Information about the change was sent to all employers in June 1987, more than six months before it was to go into effect. In August 1987 the Source Deductions function sent out a questionnaire to identify the pay period frequency of large employers to enable the Department to adjust its own records to prepare for the more frequent payments. The communication program was generally effective, and minor problems that did occur were promptly recognized and corrected.

Canada Pension Plan

The Department has not worked out an adequate memorandum of understanding with the Department of National Health and Welfare covering its role in administering the Canada Pension Plan

19.60 The Canada Pension Plan (CPP) gives the Minister of National Health and Welfare primary responsibility for the Plan and designates the Minister of National Revenue as the Minister responsible for Part I of the CPP. The Department of National Revenue - Taxation collects contributions, gathers information to be entered on plan members' records of earnings, and issues rulings. (Records of earnings, which are used to determine the level of future pension benefits, are maintained by National Health and Welfare.) Although the two departments share CPP administrative responsibilities, they have not entered into a comprehensive written memorandum of understanding -- despite a recognized need for one -- which defines in detail their specific responsibilities and the manner in which they are to be carried out. The existing two memoranda of understanding of 1986 and 1988 do not address these areas. Although officials of the two departments meet both informally and through formally constituted committees to address many matters, we feel that the absence of an adequate memorandum of understanding is an impediment to the resolution of administrative issues. Two of the more important of these issues, concerning the unidentified earnings file and cost recovery, are discussed in paragraphs 62 to 67.

19.61 The Department of National Revenue - Taxation should enter into a memorandum of understanding with the Department of National Health and Welfare that outlines their respective roles in the administration of the Canada Pension Plan.

Department's response: A Memorandum of Agreement was prepared by Health and Welfare and subsequently reviewed by officials of Revenue Canada - Taxation. A meeting was held on 2 and 3 August, 1989 to clarify and revise the proposed agreement to the satisfaction of both Departments. Most of the issues have now been resolved and the final Agreement will be ready in the very near future.

The CPP unidentified earnings file continues to grow

19.62 Contributions from plan members who cannot be identified are recorded in a series of suspense accounts known collectively as the "unidentified earnings file". Attempts are made to identify the contributors so they can be given credit on their records of earnings. If a plan member does not receive credit for the contributions, the amount of pension that he or she eventually receives will be lower than it should be. Our 1985 Report chapter on Public Pension Management noted that the number of items in suspense was increasing, and our 1987 follow-up chapter stated that the growth was continuing. At the time of this audit we noted that the number of items had further increased and was just over 4.3 million, with a total value of about $108 million (these figures exclude 4.3 million items designated as "meaningless records", which have a total value of under $3 million).

19.63 A study conducted by the Department in 1987 and a report by the CPP Advisory Board in 1988 have recommended various measures to limit the future growth of suspense accounts. Nevertheless, to date there has been no evident success in checking the steady growth of the file. The Department has told us that it is currently devising a plan of action, developing and devising projects, and preparing, for September 1989, a report to senior management of both departments.

(Exhibit 19.2 not available)

The Department has not amended its formula for recovery of costs in respect of CPP in accordance with the Treasury Board's instructions

19.64 The CPP provides for administration costs to be charged to the CPP account. Accordingly, National Revenue - Taxation each year recovers amounts in respect of its cost of providing administrative services to the CPP.

19.65 These are recovered on the basis of a formula approved by the Treasury Board in 1974. Less than two years after the formula was established it became the subject of criticism in an internal audit of CPP operations by National Health and Welfare. The formula, which called for National Revenue - Taxation to allocate costs in proportion to the categories of revenue that it collected, was said to overcharge the CPP. A study by an independent consulting firm was commissioned in 1985; in its 1987 report, it recommended an alternative basis for recovery and showed that, had this method been used, the amount recovered from the CPP for 1984-85 (the base year for the study) would have been roughly $10 million lower than the $45 million actually charged.

19.66 In January 1988 the Treasury Board instructed National Health and Welfare and other participating departments to enter into memoranda of understanding for the 1988-89 fiscal year. These were to ensure that costing criteria and principles for recovering costs were applied as recommended by the consultants. At the time of our audit, the memorandum of understanding between the Departments of National Health and Welfare and National Revenue - Taxation had not been finalized.

19.67 The Department of National Revenue - Taxation should come to an agreement with National Health and Welfare on the appropriate basis for calculating amounts to be recovered by National Revenue - Taxation from the Canada Pension Plan Account.

Department's response: As a result of a joint submission to Treasury Board, approved on 21 January 1988, Revenue Canada, Taxation and National Health and Welfare agreed to implement a revised methodology for charging C.P.P. administration costs for 1988-89. Indications are that the revised methodology would result in a lower charge of approximately $10 million mainly because the majority of costs of Quebec operations were excluded from the base in the new method.

Management Systems and Practices

Local Management Information Systems

Efficiency gains may be possible through the standardization of aspects of local management information systems

19.68 Managers at district offices and taxation centres need local systems to supplement the national systems for managing day-to-day operations. Local systems are generally based on microcomputers, and there is a good deal of experimentation as the Department explores the possibilities offered by the advanced technology. Local systems are intended to gather only information that cannot be obtained from the national systems, but some data, such as production volumes and time expended, have to be duplicated.

19.69 Local systems also provide data for the Head Office functional group to incorporate into its quarterly or semi-annual "report cards". Because the local systems are not standardized, this must be manually entered into the Head Office system. There is an opportunity for efficiency gains by standardizing local systems reports so that entry can be done automatically.

19.70 The Department should review local management information requirements and systems so that it can determine which local systems can be standardized for all district offices or taxation centres.

Department's response: This is an ongoing process and we agree to continue this effort.

Resource Allocation and Operational Planning

19.71 Resource allocation and operational planning in National Revenue - Taxation occur through a process of negotiation between the Head Office functional group and the regional offices. Each regional office represents certain taxation centres and district offices. Staff from these offices may assist the regional office in the talks. The process promotes higher efficiency in locations whose past results were below the national average, while others must at least maintain their past productivity levels.

19.72 Standards for the next year are derived from past results recorded in the Department's Time Production System (TPS). As a starting point, each location, for a given activity, is asked to at least keep pace with the better of its prior year or current year-to- date results. Those whose results were poorer than the national average will be asked to achieve the national average in the next year. This requirement can be modified in the negotiations to give recognition to a variety of factors that combine to create differences in levels of results. In a taxation centre, for example, these are: the nature, complexity and mix of the workload; the type of workforce; and facilities and equipment. The agreed-upon per-unit standard is applied to the estimated total volume of work for the next year to allocate resources.

19.73 We used 1988-89 TPS data to compare results between taxation centres for an extensive sample of activities, which covered about 1,400 person-years worth of work. We looked at the spread between the results of each taxation centre and the most productive taxation centre for each activity. Adding all activities in the sample, the spread was equal to a usage of 439 person-years. Exhibit 19.3 breaks down the total by taxation centre. However, this figure does not entirely represent potential productivity gains.

(Exhibit 19.3 not available)

19.74 In reviewing our results with the Department, we were told that in some cases the taxation centres were not comparable because units of production, although similar in nature, differed in mix and complexity across taxation centres. Although the Department can't readily quantify the amount, it told us that these reasons explain many of the differences.

19.75 The Department, where it believes it is appropriate, redefines time production codes and prescribes uniform accounting procedures to give more accurate and comparable data.

Rigorous analysis of operations may identify opportunities for productivity gains

19.76 We believe the differences in results signal the opportunity to enhance productivity -- especially, but not only, among the poorer performers. Even if the potential efficiency gains are only a fraction of the size of the total variation in productivity levels, we think the Department would be justified in using resources to find them. The key lies in the analysis of operations by persons skilled in work simplification and methods improvement to uncover inefficiencies, and in action to achieve improvements. Analysis would also disclose areas where improvements are not feasible.

19.77 Except perhaps for the nature, mix and complexity of the workload, all the factors that cause variations in productivity are controllable over time by departmental management alone or in concert with the central agencies. We are not suggesting that person-year savings from improved efficiency could be achieved overnight, nor do we know what the actual savings would be. But we believe the approach outlined above would be a valuable complement to existing mechanisms that promote greater efficiency.

19.78 The Department should, on an ongoing basis, analyze its operations to identify the reasons for variations in productivity, and make changes that will remove revealed inefficiencies.

Department's response: We spend significant resources on an ongoing basis and will continue to do so reviewing our activities in search of opportunities for improved efficiency. For instance, there are regular departmental meetings, such as the Regional Operations Committees, as well as ad hoc exchanges of information among the various taxation centres, one purpose of which is to foster improved productivity. As well, significant effort is expended in monitoring functional activities at the taxation centres, which can involve reviews by teams of experts (comprised of Head Office and experienced field personnel) looking into opportunities for enhanced efficiency. These processes are complemented by annual report cards prepared by Head Office, which analyze results in the taxation centres, and the more independent internal audits which are conducted by the Department; this information, and any resultant recommendations for changes, are reviewed by the Deputy Minister and the Committee of Revenue Executives (CORE).

We do not share your view that your study indicates a vast potential for productivity gains since, as was indicated on several occasions, the methodology does not take account of many significant differences in the tax centres themselves and in the specific activities looked at. Nevertheless, the Department agrees with the idea that comparisons should be made amongst the various tax centres, and will continue to review all possible means of making valid comparisons in order to identify potential for productivity improvement.