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1995 October Report of the Auditor General of Canada

Assistant Auditor General: Shahid Minto
Responsible Auditor: Jim Ralston

Main Points

16.1 The Air Transportation Tax (ATT) was put in place in 1974. For the year ended 31 March 1995, revenue from the tax totalled almost $589 million. Revenue Canada administers the tax and transfers its proceeds to Transport Canada where they are applied against expenditures for facilities and services provided in respect of air travel.

16.2 The key administrative memorandum relating to the ATT was issued in 1989 and has not been updated to reflect subsequent amendments to the applicable legislation. In 1993, Revenue Canada started a project to replace the old memorandum with a new document in loose-leaf format to facilitate updating. At this time, only a draft version of the document is available.

16.3 There is no centre of ATT expertise in Revenue Canada. The Department's headquarters is organized along functional lines, and responsibility for dealing with the 182 air carriers licensed to collect the tax is decentralized in district offices. The low volume of ATT-related workload in most locations affects the Department's ability to maintain the expertise needed to conduct audits and provide rulings or other assistance to air carriers. There is also a risk that air carriers will be treated inconsistently in different regions of the country.

16.4 Audit coverage has been weak in recent years due to the demands placed on audit resources by the introduction of the Goods and Services Tax. There has been some resurgence of effort recently in some district offices. During the period in which coverage was low, a number of taxation years became "statute barred" (unavailable for audit) for one major carrier. A significant loss of revenue may have resulted.

16.5 Some large balances of outstanding ATT have become uncollectable due to the financial difficulties experienced by certain air carriers in the years following deregulation of the air transportation industry. The largest part of the dollar value of accounts receivable, which totalled almost $21 million at 31 March 1995, is represented by 10 air carriers.


16.6 The Air Transportation Tax (ATT) has existed since 1974. ATT revenue for the 1994-95 fiscal year amounted to $588.8 million. Exhibit 16.1 shows the distribution of revenue by certain categories of air carrier; it also shows that the great majority of revenue is collected through a relatively small number of carriers. ATT is levied on individuals, in the case of scheduled flights, and on charterers, in the case of charter flights; it is not charged on transportation of cargo. In the most common situation, travel agents collect the tax and remit it to air carriers who, in turn, remit it to Revenue Canada. Thus, air carriers are agents for collection of the tax.

16.7 The tax is triggered by the departure from a Canadian airport of a fixed-wing aircraft that has a maximum certified take-off weight of more than 8,000 kilograms and is operated by a carrier licensed for ATT purposes. Different rates of taxation apply depending on whether a flight is scheduled or chartered and on the route taken by the ticket holder ( Exhibit 16.2 ).

16.8 Authority for the tax is the Excise Tax Act . The Air Transportation Tax is administered by Revenue Canada, which transfers the revenue to Transport Canada where it is netted against an operating expenditure vote to cover the cost of facilities and services. At present, ATT revenue is being applied against the cost of operating the Air Navigation System (ANS).

16.9 The 27 February 1995 Budget announced the government's intent to privatize the Air Navigation System. A document put out by Transport Canada indicates that, as a result of the ANS privatization, the Air Transportation Tax will be reduced or eliminated. No definite time frame for this action has been given.

Audit Objective and Scope

16.10 Our audit objective was to assess whether Revenue Canada's administration of the Air Transportation Tax serves to secure an effective check on the assessment and collection of revenue.

16.11 Our audit was conducted at the head offices of Revenue Canada and at selected district offices. We also interviewed representatives of Transport Canada as well as representatives of the air transportation industry.

Observations and Recommendations

Air Transportation Tax Legislation and Memoranda

16.12 Legislation must be sufficient to support effective and efficient tax administration. Since the legislation governing the Air Transportation Tax was put in place, there have been significant changes in the way the air transportation industry operates, largely due to decreased regulation of the industry. Also, the Goods and Services Tax (GST) has affected tax administration; the GST and ATT may or may not apply to the same transaction.

16.13 The combination of changes within the industry and the introduction of the GST has caused several questions of technical interpretation to arise. This is part and parcel of tax administration. Nevertheless, it is important that Revenue Canada and the air transportation industry, working with or through the Department of Finance and the court system, where appropriate, identify and correct technical flaws in the legislation that can lead to anomalous results and unnecessarily high compliance costs.

Revenue Canada has plans to replace the outdated excise memorandum on the ATT
16.14 It is important that information be made available to taxpayers and other interested parties to assist them in understanding the requirements of the applicable legislation. At the time of our audit, guidance concerning the Air Transportation Tax was contained in excise memorandum ET108, dated 31 March 1989. Amendments to the legislation governing the ATT since that date had not been reflected in that memorandum. In addition, Revenue Canada had determined that some definitions contained in the memorandum were incorrect.

16.15 We have been informed that in the fall of 1995 Revenue Canada will revoke excise memorandum ET108. In the fall of 1993, the Department started a project to develop a new ATT memorandum for general use in the Department and by carriers. To make it easier to keep up-to-date, the Department plans to issue the memorandum in loose-leaf format. The various parts of the memorandum now exist in draft form. The first instalment is planned for release in September 1995 and the Department expects that all sections will have been issued by the end of December 1995. Pending release of replacement memoranda, air carriers will be advised to direct questions to the Department, where they will be answered individually.

16.16 Having out-of-date or incorrect information in circulation carries with it some obvious risks. We know of only one situation where an inaccuracy in internal Revenue Canada reference material has led departmental enquiries officers to give incorrect advice to air carriers; however, it illustrates that problems can arise. While Revenue Canada honoured the advice given so that the air carrier was not disadvantaged, too little ATT was charged, resulting in a small loss to the Crown. The Department took immediate steps to correct the inaccuracies.

It appears possible to avoid a portion of the ATT through tax planning
16.17 As a general rule, whenever a tax involves multiple rates or is levied at different points or on different bases, the possibility exists for taxpayers to try to minimize the amount of tax they pay by engaging in tax planning. This seems to be true for the Air Transportation Tax. During our audit we became aware of a technique by which licensed air carriers providing charter services could reduce their Air Transportation Tax liability. Details of how this technique works have been provided to Revenue Canada and the Department of Finance. At this time, no information is available on the extent to which this technique is being used. However, use of the technique is potentially offensive, as it could defeat the policy intent underlying the Air Transportation Tax legislation and cause significant revenue leakage.

16.18 If the government decides to retain the Air Transportation Tax following the privatization of the Air Navigation System, Revenue Canada and/or the Department of Finance should evaluate the treatment of charter air transportation under the tax to determine if it is a source of significant revenue leakage.

Department's response: Neither Revenue Canada nor the Department of Finance has encountered evidence to indicate that revenue leakage is occurring. Once a policy decision has been made regarding the future of the Air Transportation Tax, Revenue Canada will assess with the Department of Finance whether inappropriate tax planning unforeseen by the ATT legislation is occurring.

Audit of Licensed Air Carriers

16.19 Effective tax administration requires, among other things, a strong audit function to ensure that the proper amount of tax is assessed and remitted to the government. The inherent risks associated with non-compliance demand that the audit function be directed at securing Crown interests on a timely basis. A strong audit function also requires sufficient resources to achieve its objectives, as well as staff who have the knowledge, skills and experience appropriate to their duties and who are provided with the tools needed to do their jobs.

A number of Revenue Canada personnel dealing with the ATT do not have much depth of experience with the tax
16.20 Except in two district offices servicing a fairly high number of air carriers, where a few auditors can specialize in the Air Transportation Tax, auditors primarily work on GST audits and only infrequently on ATT audits. At headquarters, there is a designated officer responsible for the ATT audit activity.

16.21 Formerly, there was an annual conference of ATT auditors from the district offices but this practice has been discontinued. Lack of interaction among ATT auditors may be leading to audits that are less efficient and effective than they might be, because auditors are unable to share information on problems and best practices. Mitigating this concern somewhat is the fact that modern communications technology helps ATT auditors in different parts of the country consult with each other on specific matters.

16.22 There may be reason for concern that in some district offices the planned reorganization of audit activities will further dilute the emphasis that can be placed on the Air Transportation Tax. A reallocation of the ATT audit workload among district offices serving southern Ontario prompted one large foreign carrier to complain about the consequences of a loss in continuity and expertise of staff assigned to the audit of the carrier.

16.23 There are no training programs aimed specifically at the Air Transportation Tax. Training takes place on the job in district offices. A training task force within Revenue Canada's Verification, Enforcement and Compliance Research Branch, in its report dated April 1995, has identified potential training needs, which will be validated through a formal training needs assessment. Among the potential training needs identified is training on the basic concepts of the air transportation industry. The priority of this item will be determined after the needs assessment is completed.

16.24 Revenue Canada should create centres of Air Transportation Tax expertise, perhaps by centralizing ATT administration functions, including audit, in one or two district offices.

Department's response: Revenue Canada has a designated officer at headquarters responsible for the Air Transportation Tax audit program whose expertise is readily available to field officers. Should the ATT be retained, Revenue Canada will examine alternatives to ensure that an appropriate distribution of ATT expertise is achieved.

Audit coverage is improving after a period in which it reached very low levels
16.25 Adequate plans for auditing the population of licensed air carriers are required. It is important that audits be performed efficiently, fairly and consistently. The Department ought to seek out and implement innovative audit methods and practices, where feasible and cost-effective.

16.26 At the headquarters level, there is an overall plan for the audit activity of which ATT audits form a part. This is reflected at the district office level where the bulk of effort is directed to GST audits. ATT licensees are extremely small in number compared to GST registrants. To date, Transport Canada has not been involved in determining an appropriate extent of ATT audit coverage. However, Transport does have an idea of what it would consider adequate and now has an agreement with Revenue Canada to obtain information on the latter's audit plans for monitoring purposes.

16.27 For several years, low levels of audit coverage have been a concern to Transport Canada, which relies on the Air Transportation Tax as a major source of revenue. Its concerns were intensified when the GST was introduced since it felt that the additional demand on Revenue Canada's audit resources might cause ATT audit coverage to weaken further. Transport Canada was concerned about one large carrier in particular, since the long interval between audits created a risk that certain taxation years would become "statute barred", meaning that Revenue Canada could not audit them. This in fact did occur and seven years were not covered by audit. Based on the results of audits performed before and after the statute barred period, it is reasonable to expect that a loss of millions of dollars of revenue may have resulted.

16.28 Audit coverage has improved recently. In the last four years, Revenue Canada has performed 35 ATT audits resulting in total assessments of tax, interest and penalty in excess of $20 million. Of these audits, 28 were performed in the last two years. The total population of licensed air carriers numbers 182.

16.29 With respect to the failure to audit one large carrier for several years, we are advised that changes in departmental policy will prevent such occurrences in the future. The "large file program", which existed for many years in the former Taxation department, will be extended to cover all types of tax revenue, including the ATT, now that Taxation has been merged with Customs and Excise. Taxation's policy on the large file program stated that "large cases" would be audited every two years; under the merged Revenue Canada entity, this policy will be changed to require full-scope audits of large corporations at least twice within a five-year span and limited-scope reviews in other years.

Absence of up-to-date guidance for ATT audits poses a danger that inappropriate or inconsistent audit approaches will be used
16.30 An audit guide designed for use in ATT audits was issued in 1983 and amended in 1987; it is still available for use. This audit guide is even older than excise memorandum ET108, which is outdated and soon to be revoked. Auditors told us that the ATT audit guide does not reflect the way audits are normally performed now and so is used infrequently. Revenue Canada's Audit Laptop System contains an air transportation industry profile and certain general audit guides designed for GST that can be applied to ATT audits. When the general ATT memorandum discussed in paragraph 16.15 is finalized, Revenue Canada plans to use it as a basis for development of an audit manual for ATT field auditors. The Department is currently updating the air transportation industry profile within the Audit Laptop System and is incorporating certain information of specific relevance to the ATT in the profile.

16.31 Our examination of completed audit files revealed a variety of audit approaches used in different district offices. The air transportation industry is aware that different approaches are used and is concerned that all carriers may not be treated equitably. In our view, the fact that audits are performed differently does not necessarily indicate inequitable treatment. Differences in air carriers' record-keeping practices or differences in the level of risk of non-compliance associated with particular carriers do justify tailored audit approaches. However, such differences ought to occur within a consistently applied audit-planning framework. Given that the tools ATT auditors have at their disposal consist of an outdated audit guide and materials that were designed for use in audits of a different tax, we do not feel that an adequate audit-planning framework exists for the Air Transportation Tax.

16.32 Information that we obtained on notices of objection and on appeals to the courts in respect of the Air Transportation Tax indicates that several disputes have arisen over the audit techniques used by Revenue Canada. Out of 14 objections and appeals dating back to 1988, three involved disagreement over analytical techniques used by Revenue Canada and four involved disagreement over the Department's sampling procedures. In the case of one air carrier, the assessment issued pursuant to an audit was disputed for several years on the grounds that certain audit procedures used to arrive at the assessment were inappropriate. As a result of this case, Revenue Canada, in a subsequent audit of the same air carrier, made important adjustments to its approach in order to produce a more defensible result.

16.33 Revenue Canada should develop a framework for ATT audit planning to ensure that appropriate audit techniques are selected for use and are consistently applied.

Department's response: Today, Air Transportation Tax audits are included in Revenue Canada's audit workplans. In order to ensure quality and consistency in departmental audits, whether they relate to ATT, GST or Income Tax, Revenue Canada has, as part of its restructuring, introduced a Quality Assurance Program. Through the quality assurance reviews that are conducted under the Program, the Department examines the application of technical advice, policies and procedures to ensure consistency and to confirm that appropriate standards are met. The transfer of larger carriers to the Large Business Program will further assure consistency among these carriers. In the event that the ATT is retained, Revenue Canada will examine options for further enhancing measures to ensure consistent and appropriate audit techniques are applied nationally.

16.34 Headquarters relies on local review processes to ensure that audits are performed to an acceptable standard of quality. The headquarters audit function is involved in consultations with field auditors concerning particular cases.

16.35 One risk related to the Air Transportation Tax is that a carrier may fail to become licensed. To date, Revenue Canada has discovered unlicensed carriers through chance observations by auditors and through complaints from licensed carriers. In the past, Transport Canada provided Revenue Canada with information on licence applications that it could follow up on to ensure that carriers are licensed. However, Revenue Canada did not find this information useful; it needed information on approvals rather than on applications. Recently, Transport Canada has begun sending information on approvals and, in the future, this information will be the basis for follow-up by district offices.

16.36 Revenue Canada should develop a more organized approach to ensuring that air carriers, where appropriate, are licensed to collect ATT.

Department's response: Revenue Canada identifies air carriers from a number of different sources, including:

  • referrals from the National Transportation Agency (NTA), listing new air carriers that they have licensed;
  • database matching between air carriers licensed for Air Transportation Tax on the Excise Commercial System and air carriers licensed by the NTA; and
  • referrals/complaints from other air carriers.

Should the ATT be retained, the Department will examine its procedures for verifying that air carriers required to collect the ATT are properly licensed to ensure that they are effective.

Collections and Revenue Accounting

16.37 It is important that the accounting system accurately accumulate data in sufficient detail to facilitate timely, meaningful reporting of financial information.

16.38 Revenue Canada accounts for the ATT using the Excise Commercial System (ECS), which is distinct from the Goods and Services Tax system. When the ECS was developed, the Federal Sales Tax represented the bulk of the volume. Since that tax no longer exists, the ECS is not being improved.

16.39 Because proceeds of the ATT are added to its operating appropriation, Transport Canada requires timely and accurate transfers of revenue to enable it to manage its expenditures. This is most important near the end of the fiscal year, at which time Transport Canada needs to ensure that it does not spend more funds than are available in the appropriation. Problems experienced in the recent past with the timeliness of transfers appear to have been resolved. Transport Canada uses information that it has to monitor transfers in respect of selected air carriers.

16.40 As a consequence of the merger of the former Taxation and Customs and Excise departments, Revenue Canada is in the process of consolidating its collection function. Consolidation is meant to remedy problems that can occur when, for example, a collection officer is dealing with a company, such as an air carrier, that owes money for more than one type of tax (for example, ATT, GST or income tax). At present, the collection officer does not have simultaneous access to information on all outstanding tax balances. To get a complete picture of the air carrier's status, the officer needs to consult multiple systems. This is a source of some inefficiency. Revenue Canada is presently developing an umbrella system that will take information from the income tax and GST systems in order to produce a consolidation of outstanding tax debts. In a subsequent phase of development, this system will be expanded to include other types of tax revenue; however, Revenue Canada's preliminary assessment is that it may not be cost-effective to include the Air Transportation Tax in the integrated revenue collections system due to the small number of accounts involved relative to the associated information technology development costs. An alternative might be to develop a manual system for the ATT.

16.41 During our audit we encountered difficulties in obtaining various information and analyses on ATT revenue and accounts receivable from the Department. The apparent causes of the problems are limitations in the Excise Commercial System and the difficulties departmental staff have in using the system, now that it is no longer applicable to one of the Department's main revenue sources.

16.42 If Revenue Canada no longer finds it economical to maintain and upgrade the Excise Commercial System, the Department should consider an alternative to that system.

Department's response: Revenue Canada is currently reviewing the role of the Excise Commercial System. The Department is in the process of examining alternative methods of carrying out certain ECS functions. To date, two decisions have been made concerning the future of ECS:

  • The licensing component of ECS is scheduled to become part of the Business Number initiative in 1997.
  • The accounting function of ECS will be integrated in the Standardized Accounting System in 1997-1998.

The Department will continue to explore the feasibility of alternatives to the remaining components of the ECS, including the possibility of linking the accounts receivable component of that system to the Revenue Canada centralized collections system.

A large portion of ATT accounts receivable relates to carriers that experienced financial difficulties following industry deregulation
16.43 Substantially all of the dollar value of ATT accounts receivable as at 31 March 1995 is made up by just 10 air carriers out of the total population of 182 licensed carriers. Approximately $17.3 million (83 percent) is owed by 7 domestic air carriers and approximately $1.7 million (8 percent) is owed by 3 foreign air carriers. Total accounts receivable are $20.9 million ( Exhibit 16.3 ). Further analysis shows that $16.2 million (77 percent) represents unpaid tax, $2.3 million (11 percent) represents unpaid interest and $2.4 million (12 percent) represents unpaid penalties ( Exhibit 16.4 ).

16.44 An analysis of ATT accounts receivable by age of debt and category of air carrier ( Exhibit 16.5 ) reveals an interesting pattern. The categories used are carriers experiencing financial difficulty, and other ("regular") carriers. Accounts receivable less than one year old amount to $5.8 million (28 percent of the total) and almost all of this relates to "regular" carriers. For the $7.0 million in accounts receivable from one to two years old (33 percent of the total), just under one quarter pertains to "regular" carriers and the rest relates to carriers in financial difficulty. Virtually all of the $8.1 million in accounts receivable over two years old (39 percent of the total) belong to carriers in financial difficulty. Several air carriers experienced severe financial difficulties following deregulation of the air transportation industry. In the past few years, Revenue Canada has written off five accounts receivable totalling $12.1 million. Judging from the pattern shown in Exhibit 16.5 , we can expect other large write-offs to follow.

16.45 It appears that, except for the carriers in financial difficulty, accounts receivable are generally paid in the normal course of business without Revenue Canada having to take collection action.


16.46 The deregulation of the air transportation industry and the introduction of the Goods and Services Tax had a significant impact on the administration of the Air Transportation Tax. Questions on interpretation of the ATT legislation arose, administrative memoranda became outdated, audit coverage reached very low levels and ATT expertise available within the Department diminished. In addition, large write-offs of uncollectable accounts receivable occurred, more write-offs appear certain in the future, and the accounting system may no longer be viable.

16.47 In some important areas, problems are being addressed. Certain questions of legislative interpretation are before the courts for resolution, revised administrative memoranda are being prepared, and the level of audit coverage has rebounded considerably.

16.48 However, in other areas, problems persist. There is no up-to-date ATT audit-planning framework to ensure that auditors choose their audit approaches consistently. This is all the more significant because ATT administration is dispersed among several district offices and staff often have limited opportunity to develop knowledge of the tax and of the audit techniques appropriate to it. Also, departmental staff continue to use an accounting system for the Air Transportation Tax that is becoming obsolete. The recommendations contained in this chapter are offered as potential remedies for these remaining problems.

Audit Team

Tom Allen
Nabi Baksh
Jayanta Chatterjee
Dan Duguay

For further information, please contact Jim Ralston, the responsible auditor.