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1996 November Report of the Auditor General of Canada

Main Points

36.2 Proposed technical amendments related to residential real property that were announced by the government on 23 April 1996 promise to address certain areas where non-compliance or unintended results are occurring. However, administration of the New Housing Rebate program is faced with difficulties that may require legislative change or additional interpretive guidance by Revenue Canada to resolve. A program evaluation of the New Housing Rebate program would provide valuable input for consideration of these matters.

36.3 Revenue Canada directs fairly strong audit efforts toward New Housing Rebate payments for "owner-built" homes, but its efforts directed toward rebates paid for "builder-built" homes are much weaker. While the former rebates are higher-risk, the latter are not free of non-compliance risk and, in total, are far more significant to the federal treasury ($218 million out of a total of $303 million in New Housing Rebate payments for the year ended 31 March 1996).

36.4 Revenue Canada's information systems cannot currently provide much of the information needed to manage the New Housing Rebate program.

36.5 One of Revenue Canada's Tax Services Offices conducted a successful audit project aimed at non-compliance with the "self-supply" rules pertaining to multiple-unit residential complexes. This project may be worth replicating in other areas of the country.

36.6 There is some concern that a provision of the Excise Tax Act that is meant to provide equitable treatment for unincorporated professional builders who construct homes for their personal residences may be used by small-scale builders to build homes for resale in a manner that avoids the GST. While Revenue Canada's assessments against such builders have, for the most part, been upheld by the Tax Court of Canada, the Department and the Department of Finance continue to monitor the situation.

36.7 Revenue Canada's policy on voluntary disclosure does not provide a great deal of encouragement for builders who have not complied with the self-supply rules to come forward and bring themselves into compliance.

Introduction

Application of the GST to residential real property transactions is complex

36.9 The general rules are supplemented by numerous special rules to deal with particular situations. This is a reflection of the variety and complexity of transactions and circumstances involving residential real property. Differences in provincial real property laws contribute to the complexity and create a challenge for Revenue Canada to ensure that the GST is applied so that its effects are similar in all provinces. In the Province of Quebec, the GST is administered in accordance with Revenue Canada's direction by the Ministère du Revenu du Québec (MRQ). Our audit was confined to Revenue Canada's areas of responsibility and thus excludes the MRQ.

36.10 Much of the non-compliance with the residential real property provisions of the Excise Tax Act that Revenue Canada encounters can be attributed to the complexity of the provisions. Because Canada's tax system is based on the principle of self-assessment, full voluntary compliance requires that taxpayers/registrants know how to comply. The more complex the rules, the greater the likelihood that some non-compliance will occur simply due to ignorance or misunderstanding of the law. Many people and businesses enter into residential real property transactions only infrequently - some are individuals buying homes; some are individuals or businesses who are involved in "one-time" ventures. Often, timely completion of transactions is important and people carry them out without having first explored their tax implications. Even among businesses that operate regularly in the residential real property sector, many are small enterprises that may not have ready access to tax expertise.

36.11 Another consequence of complexity is that taxpayers/registrants who try to comply with the law incur higher compliance costs in connection with their efforts. Compliance costs include expenditures for acquiring knowledge of the tax system; compiling data on tax paid and tax collected; preparing and submitting tax returns; professional advice; and incidental costs such as postage, telephone, overhead and storage costs.

Focus of the audit

36.13 Further details on the audit objective, scope and criteria are presented at the end of the chapter in the section About the Audit .

Observations and Recommendations

New Housing Rebate

36.15 The GST New Housing Rebate is generally 36 percent of the GST paid on the purchase of a new residential complex. The calculation varies somewhat for particular types of residential complexes, for example, where shares in a housing co-operative are involved. The rebate is subject to a threshold ($350,000 in the typical case) above which the amount of the rebate is reduced. This means that the maximum rebate is $8,750. At a purchase price of $450,000, the rebate is zero. This "clawback" provision reflects the government's desire not to provide relief to owners of higher-priced new homes. A technical paper issued by the government prior to the introduction of the GST stated the government's intention to review the threshold at least every two years so that it could be adjusted to reflect changes in economic conditions and housing markets.

36.16 The GST New Housing Rebate is available to the purchaser of a new residential complex. However, the law allows a purchaser to assign the rebate to the builder (vendor) of the new residential complex. This is apparently intended to relieve the purchaser of the need to obtain financing for the full purchase price; instead, the purchaser needs to finance only the purchase price net of the rebate.

Proposed technical amendments extend availability of New Housing Rebate

36.18 However, a number of other administrative challenges remain that may require correction by future legislative amendments or the issuance of policy statements by Revenue Canada. These will be discussed in the remainder of this section. Out of 183 GST-related policy statements issued by Revenue Canada, 28 deal with real property issues. Seven more policy statements on real property issues are currently being prepared. Clearly, the real property sector, which includes the New Housing Rebate, is extremely complex and troublesome for registrants, claimants and tax administrators alike.

Enforcement of "boundaries" takes a great deal of effort

36.20 One such boundary relates to the term "substantial completion", particularly as it applies in situations where owners of property build a residence or have one built for them. The Excise Tax Act stipulates that an owner-builder may apply for a New Housing Rebate within two years of "substantial completion" of the residential complex. There is no definition of the term in the Act and, despite the Department's attempts to clarify its meaning and application in policy statements, it remains a source of disputes in the context of audits and appeals. Revenue Canada uses the administrative guideline that a complex must be at least 90 percent complete to qualify as "substantially complete". Engaging in such disputes involves compliance costs for claimants and administrative costs for Revenue Canada.

36.21 To illustrate the significance of this matter, we present two hypothetical situations in which an owner-builder engages in tax planning to obtain the most generous rebate possible. (We use an owner-builder in these examples because, in practice, most of Revenue Canada's audits of the New Housing Rebate focussed on owner-builders.)

36.22 We will explain the first hypothetical situation with the aid of a comparison. In the first scenario, a builder completes a house according to usual practice and sells it to a purchaser. The purchaser, either by choice or because he or she is unaware of the opportunity, does not order any "extras" prior to the sale and assigns his or her New Housing Rebate to the builder upon closing the deal. If the purchaser adds extras later, any GST paid on them is not rebatable because the amount of the rebate is based on the builder's price to the purchaser. In another scenario, an owner-builder has the flexibility to incorporate extras (such as landscaping, deck and swimming pool) into the residential complex within two years of first occupancy and prior to declaring it substantially complete (at any point after 90 percent completion) and submitting a claim for the New Housing Rebate. These extras qualify for the rebate.

36.23 Where the fair market value of the house being built is expected to exceed $350,000, the owner-builder may take advantage of the vagueness in the term "substantial completion" to avoid some or all of the clawback of the New Housing Rebate. Here, the owner-builder could declare that the house is substantially complete at a time when the fair market value of the house is less than $350,000 but the house is 90 percent complete. Any further expenditures would then not trigger the clawback that occurs for new residential complexes whose fair market value lies between $350,000 and $450,000.

36.24 Another way to avoid the effects of the clawback for owner-built homes relates to the use of the concept of fair market value in the formula for determining the amount of the clawback. We understand that the reference to fair market value is meant to ensure that the value of the land on which a house is situated is considered in the clawback calculation. This is apparently intended to deal with situations in which the land was not acquired in a recent market transaction, for example, land acquired by inheritance. However, the fair market value concept is applied to the entire residential complex and the fair market value of the residential complex may be lower than cost. This could happen where a high-cost home is built in an area that is not noted for expensive homes, and the fair market value determined on the basis of comparable sales would be lower than cost. For example, if the cost exceeded $350,000 but the fair market value were less than $350,000, the clawback would be avoided. One leading court case involved exactly this situation.

36.25 This problem is a variation of another problem that was recognized by the government and for which a solution is contained in the proposed technical amendments announced on 23 April 1996. That problem concerned the taxation of social housing projects. The self-supply rules applicable to projects of this type also make reference to fair market value - in this case, as a basis for calculating the amount of GST liability. However, because such projects are not subject to a "market", the application of private-sector-oriented valuation techniques has routinely resulted in the assignment of fair market values that were substantially below cost. Since there have been many such projects, including some very large ones, the tax loss has been significant. The proposed solution is outlined in Exhibit 36.2 .

36.26 It is difficult to estimate the extent to which situations analogous to the illustrations presented in paragraphs 36.22 to 36.24 actually occur now or are likely to occur in the future. Based on interviews with Revenue Canada officials in some of the Tax Services Offices we visited, we understand that examples of each type have been encountered. In any event, it is clear that the effort expended by Revenue Canada to ensure that dates of substantial completion are reasonable, items of expenditure are allowable, and fair market valuations are reasonable represents a significant administrative cost.

An evaluation of the New Housing Rebate program is needed

• Are owner-builders able to obtain rebates for GST paid on categories of expenditure ("extras") that other rebate claimants are not?
• Is the "clawback" operating effectively to deny the New Housing Rebate to those who acquire very expensive homes?
• Should the use of the fair market value concept be limited, as it was for the provisions affecting social housing in the 23 April proposed amendments?
• Are ineligible persons more likely able to obtain the New Housing Rebate by assigning it to builders, and are builders placing themselves at risk of possible collection action by Revenue Canada in respect of such rebates?
• How great are the compliance and administration costs associated with the program, and is it feasible to modify the program in order to reduce such costs?

• What has been the effect of the lower effective GST rate (that is, net of the New Housing Rebate) on the residential construction industry?
• Does the structure of the program (for example, the clawback threshold) provide equitable distribution of benefits, given regional variation in the level of new home prices? ( Exhibit 36.3 )
• Do purchasers who choose to assign their rebates to builders benefit from the program to the same extent as those who choose to obtain their rebates personally?

Finance's response: The Department of Finance continues to monitor the New Housing Rebate Program on an ongoing basis. However, the Department will consider the need for an evaluation in conjunction with other evaluation priorities.

Revenue Canada's response: Revenue Canada will consider the need for an evaluation of the GST New Housing Rebate program in consultation with the Department of Finance as part of its ongoing evaluation planning activity.

Automated edit checks provide basic screening of claims

36.31 Most of the processing steps up to and including the approval/payment of the rebate are performed at the Summerside Taxation Centre (see Exhibit 36.4 ). Some claims require more extensive pre-approval/payment verification than the processing centres are equipped to handle, and are referred to one of Revenue Canada's Tax Services Offices (TSO) for audit. Data are sketchy, but based on partial information for the year ended 31 March 1995, it appears that roughly 28 percent of claims pass the edit checks and are approved/paid after a cursory review of the documentation supporting the claim by the Summerside Taxation Centre. A further 54 percent of claims are approved/paid after a somewhat more extensive review by either the STC or Tax Services Office. The remaining 18 percent of claims are subject to an audit by the TSO and result in adjustment or disallowance.

36.32 At the Summerside Taxation Centre, applications are sorted by rebate type, such as owner-built and builder-built, and subjected to a preliminary review to determine whether all mandatory information has been provided. All rebate applications are sent for input into the data processing system; however, incomplete applications are flagged on the system so that approval will not be given until the application is satisfactorily completed. If necessary, the Centre contacts the applicant to obtain missing information and returns unsigned applications to the sender for signature. No data are available on the number of claims for which information to complete the claim or signature is requested.

36.33 At the time of data capture, claims are subject to a number of automated edit checks and selection criteria designed to identify any suspect claims. Claims identified in this manner are forwarded to the STC Review and Verification Unit or to the appropriate Tax Services Office for review and/or audit. In other words, approval/payment of claims is not denied on the basis of automated edit checks alone, merely deferred. Claims failing the automated edit checks are examined further. However, claims that pass the automated edit checks are approved/processed for payment.

36.34 The automated edit checks look for duplicate claims by comparing the present application with records of other applications. This comparison is made using a number of common reference factors in order to increase the probability that a duplicate claim will be noticed. We reviewed some exception reports indicating items identified by the automated edit checks as potential duplicate claims or claims with other potential problems.

36.35 The automated edit checks also look for calculation errors, claims in excess of allowable maximums, logical inconsistencies in information provided on claims, and claims that have been filed late. The selection criteria programmed into the automated system also flag claims that have a high risk of problems such as ineligible claimants, properties and items of expenditure. The system does not necessarily look for these specific problems but may simply select types of claims that are perceived to have a high risk of containing any of a number of kinds of problems. For example, any claims in which the rebate is to be paid to the purchaser rather than assigned to the builder are routinely flagged for further review.

Audit activity focusses on claims by "owner-builders"

36.37 All other types of New Housing Rebate payments are paid directly to the purchaser/owner-builder (estimated to be about one third of all claims). Revenue Canada determined that these claims had a higher risk of error and should be subject to prepayment audit. (Unlike builder-assigned rebates, purchaser/owner-builder rebates would not normally be subject to an audit after payment. Thus there would be no further opportunity to detect and recover any amounts paid in error.) This decision was based, in part, on the high rate of errors discovered on the applications. One Tax Services Office we visited estimated that, on average, New Housing Rebate claims were reduced in amount by about 20 percent as a result of audit.

36.38 For the year ended 31 March 1996, 37 percent of the number (35,450 out of 95,390) and 28 percent of the value ($85 million out of $303 million) of approved New Housing Rebate claims were filed by owner-builders. Many "owner-built" situations are similar to "builder-built" situations in all respects but one ' the land and building are sold to the purchaser in separate transactions. In some provinces, this structure is used to reduce land transfer taxes. However, it has the side effect of causing Revenue Canada to classify the purchaser as an "owner-builder" for rebate purposes. Thus, this structure carries with it the added advantage of enabling the owner-builder to possibly hold open the date of "substantial completion" and to increase the base of GST-paid expenditures on which the New Housing Rebate is calculated, as discussed in an earlier part of this chapter.

36.39 In 1996 the Summerside Taxation Centre began a pilot project with one of the regions. In that region, all applicants for the New Housing Rebate for owner-built homes are required to submit all the original receipts, an information sheet, and a cost summary worksheet supporting all amounts recorded on the application as GST paid. The STC reviews all the receipts, and notes (on the electronic notepad) any errors and other comments before forwarding the information to the Tax Services Office for further audit. It is expected that this manner of processing will improve utilization of available staff resources as non-audit staff at the STC are used to perform duties that were previously conducted by auditors at the Tax Services Office. In addition, it is expected that this will result in a more consistent and uniform application of allowable expenses. However, no results data are yet available given that the pilot project was only recently started.

Prepayment audits and post-audits provide further opportunities to examine builders

36.41 Once received at the Tax Services Office, the return information is screened by an audit manager. The audit manager decides whether to refer the return for an audit or approve payment without audit. The Department does not wish to cause undue delays in making payments to registrants as this could adversely affect registrants' cash flow and increase interest payable by the Department (which begins 21 days after the return is filed). For those reasons, about 85 percent of credit returns are normally paid quickly. The Department feels it has an additional measure of protection in the case of registrants in a credit position because it could still select the registrant for a post-payment audit at any time within the next four years. Although we were told that builder-assigned New Housing Rebate payments could be examined through the audit of credit returns, we were unable to obtain statistics on the extent to which this actually happens.

36.42 Post-audit. The term "post-audit" refers to an audit of a registrant's past GST returns. During our visits to headquarters and district offices, managers outlined the sources of information used for selection of registrants for post-audit, such as leads from all sources, credit returns from the Audit Workload System, quarterly reports on builders, information contained in the Registrant Database and other databases such as business licences, building permits and income tax information. The nature and extent of registrant selection using one or more of the available tools is left up to the individual Tax Services Offices. Several TSOs we visited used commercial software tools to review the registrant database for trends and potential audit leads. The post-audit selection system (PASel) is a computerized tool that helps to identify high-risk registrants. The Department is presently working on a second-generation PASel system that will improve upon the original version.

One Tax Services Office we visited focussed on audits of large builders

36.44 Other areas of non-compliance included failure by the builder to assess GST under the "self-supply" rules (for example, where units intended for sale as condominiums are instead rented out) and failure to remit to Revenue Canada all GST collected from home purchasers.

36.45 Revenue Canada should assess whether, on a national basis, there is sufficient audit coverage of builders. In particular, the Department should consider whether enough work is being done to verify New Housing Rebate payments that have been assigned to builders.

Revenue Canada's response: The Department concurs with this recommendation and, as noted by the Auditor General, one of our larger Tax Services Offices chose to audit all large builders/developers in its area. If results of this project warrant, the Department will undertake a national project within the next fiscal year.

Builders are at risk if purchasers are not eligible for the New Housing Rebate

36.47 We understand that the New Housing Rebate Program allows for the assignment of rebates in order to ease the burden of financing on purchasers. This implies that Revenue Canada would wish to remove any unnecessary impediments to builders' acceptance of rebate assignments. If builders are made aware of their "due diligence" requirements, and if they comply with them, they should be able to accept rebate assignments without exposing themselves to undue risk.

36.48 Revenue Canada should provide guidance to builders on the Department's expected minimum standards for due diligence when determining the eligibility for the New Housing Rebate of purchasers from whom they accept assignment of the rebate.

Revenue Canada's response: The Department works through industry associations like the Canadian Home Builders Association to improve the flow of information and the understanding of eligibility of purchasers for the New Housing Rebate. At the beginning of the implementation of the New Housing Rebate program, a bulletin was provided to all builders on our database that included information on standards for due diligence. As well, field auditors were provided guidance on this issue in a directive. Revenue Canada will continue to provide reminders to the building community.

Little reliable information is available on a timely basis

36.50 During our audit we requested various statistics relating to the New Housing Rebate program, including the total amount of rebates paid by type of rebate, total number of claims processed, number of claims that were subject only to automated processing, and number of claims that were subject to further manual processing and/or audit by Summerside Taxation Centre or the various Tax Services Offices. Some of this information is not readily available for the full period covered by our audit. The report that had previously provided this information was discontinued as of 31 March 1995 because it was discovered that systems problems were compromising the accuracy and reliability of the reported results. The Department is currently writing software that will enable it to gather the information, but it is not known when it will be ready.

36.51 We also requested information on the number of audits performed by type of claim, the types of errors encountered, and the tax changes that resulted from those audits. While none of this information is routinely available, some of it can be obtained on request, although a request takes about 90 days to process. Some information, such as the number of claims that are not audited despite having been flagged by the automated edit checks or selection criteria, and the types of errors found, is not available at all.

36.52 Revenue Canada should ensure that reliable and appropriate information with which to manage the New Housing Rebate program is available on a timely basis.

Revenue Canada's response: Some changes to our processing and reporting systems were made during the course of this audit. Also, the Department has completed writing the software referred to by the Auditor General and is now in a position to gather the required reliable information on a timely basis.

Self-Supply

36.54 These self-supply rules apply to all residential complexes. For multiple-unit residential complexes, the builder must remit seven percent GST on the fair market value of the entire building at the time the first unit is rented. In some instances, builders complete a complex intending to sell the individual units as registered condominiums, but in an attempt to increase cash flow or to wait until the market improves, instead rent all or some of the units and fail to report on the fair market value of the rental portion of the complex. Renting out the units will also disqualify them from the New Housing Rebate as they will now be classified as "used" units.

36.55 The assessment and remittance of the GST on the fair market value of the complex is dependent on the builder's voluntary compliance with the self-supply rules. A loss of GST revenue arises when the builder fails to self-assess and remit the GST payable when the self-supply is deemed to occur. This is, in fact, a relatively frequent occurrence. A contributing factor may be that some of the builders "caught" by the self-supply rules are not GST registrants. One can expect a higher degree of knowledge about the GST among registrants than non-registrants.

36.56 One of the ways Revenue Canada can enforce timely compliance with the self-supply rules for rental complexes is to develop specific detection and enforcement techniques. Without a specific audit project, many of these complexes can remain undetected for considerable time, and circumstances could arise where collectability of the assessment could be impaired. This is true despite the fact that there is typically an extensive trail of documents that can be used to identify such complexes.

An audit project was directed at "self-supply" issues

36.58 During our audit, we found that the level and nature of enforcement activities to ensure compliance with the self-supply rules varied among the Tax Services Offices visited. While some Offices have attempted to ensure compliance with the self-supply rules during regular audits, where applicable, and review building permits and title transfer databases when time and personnel resources are available, they do not appear to use these detection and enforcement techniques in a systematic and thorough way.

36.59 Revenue Canada should consider the merits of having a national audit project to address the problem of non-compliance with the self-supply rules applicable to builders of multiple-
unit residential complexes.

Revenue Canada's response: The Department established the project referred to in the chapter to assist in determining the compliance risk associated with self-supply rules to builders of multiple-unit rental buildings. The results of this project are being assessed. Analysis will be completed by the end of next fiscal year. If results of this project warrant, the Department will undertake a national project.

Initial concern over potential loophole is abating

36.61 To set the stage, consider a situation in which an individual who is in no way in the business of constructing or selling houses constructs a house, using much of his own labour, for his personal occupancy as a residence. The individual will pay GST on the materials and other inputs purchased from a GST registrant in order to undertake the construction. When the individual begins to occupy the house, there will be no further GST payable. This should result in a lower amount of GST liability than would have been incurred had the individual purchased an identical property from a builder. This is because the individual would not have paid GST on things such as the builder's profit, the value of services performed by the individual and certain costs that are GST-exempt to the individual (for example, interest charges, insurance and property taxes).

36.62 Now consider a situation in which an individual who is in the business of constructing or selling houses constructs a house for his personal occupancy as a residence. In the absence of any special rules, this individual, because he would be a "builder" as defined in the Excise Tax Act , would be deemed to have made a "self-supply" and would have to pay GST on the fair market value of the property. To avoid this result and ensure that the "builder" is not treated more harshly than the ordinary individual, the Excise Tax Act provides a special rule that excludes an individual from being a "builder" in this situation and therefore from the self-supply rules.

36.63 Revenue Canada has encountered cases where builders, under the guise of having constructed houses for their personal occupancy, have attempted to avoid the GST that would be imposed under the self-supply rules and then sell the houses as used properties, which are GST-exempt. Typically in these situations, the builders have constructed and sold a number of houses in a relatively short time, trying to side-step the self-supply rules each time. This pattern has caused the Department to coin the term "house hopper" to describe the individual involved.

36.64 If successful, the house hopper not only stands to save a portion of the GST (see Exhibit 36.6 ), but also may qualify for the New Housing Rebate and thus obtain a partial refund of the GST he or she paid on materials and services used in construction of the house. The house hopper may also fail to declare the profits from the sale of the houses thus evading income taxes.

36.65 When Revenue Canada notices a house hopper, it issues an assessment to recover the GST avoided and any unentitled New Housing Rebate. When the first such assessment to be challenged in the courts was overturned, the Department became concerned that a loophole had been discovered and that it would be unable to take effective action against house hoppers' activities. However, three subsequent court cases involving house hoppers have been found in Revenue Canada's favour, causing the initial concern to abate somewhat.

36.66 Nevertheless, both Revenue Canada and the Department of Finance feel that the situation needs monitoring. The fact that the result in each of the four cases has been reasoned on somewhat different grounds suggests that there may be some ambiguity in the wording of the relevant provisions. For example, differences between the provision relating to payment of the GST and the provision establishing entitlement to the New Housing Rebate in the terms used to describe one particular concept have led to mixed findings within the same case.

36.67 All of the court cases to date have been heard under the Tax Court of Canada's informal procedure and therefore do not have precedential value. A decision under the Tax Court's general procedure or a decision of a higher court could provide greater certainty about how the law should be interpreted.

36.68 Revenue Canada and the Department of Finance should continue to monitor evolving jurisprudence as it relates to the issue of "house hoppers" in order to determine whether there is a technical problem with the wording of the Excise Tax Act that would need to be remedied by way of legislative amendment.

Finance's response: The Department, along with Revenue Canada, will continue to monitor this issue, and evaluate the desirability of legislative amendments in light of future court decisions.

Revenue Canada's response: Given that the Department has been successful in three out of four court challenges, it is not clear whether a legislative amendment is required on this issue. However, the Department will continue to closely monitor non-compliance in this area and will work with the Department of Finance to address this concern.

The voluntary disclosure policy provides little encouragement for non-compliant builders to come forward

36.70 In practice, the six percent penalty is not waived; a voluntary disclosure brings full interest and penalties and the total amount payable is likely to be the same as if the transaction were found during an audit. It is believed that people who attempt to comply with the law but who have erred find little comfort when they come forward in good faith. We are aware that some tax professionals are advising clients not to make a voluntary disclosure when they discover that they have made innocent errors but instead to "stop the clock" by making the appropriate remittances and to wait for an audit.

36.71 During our audit we requested various statistics on GST voluntary disclosures. However, the number of voluntary disclosures is not available since there is no recording system in place in most Tax Services Offices to track them.

36.72 The current policy on voluntary disclosure does not appear to be producing the intended results. It discourages disclosure by even those registrants who have sincerely tried to comply with complicated legislative provisions yet have failed, as agents of the Crown, to collect the tax from others.

36.73 Revenue Canada, in consultation with the Department of Finance, should evaluate its voluntary disclosure policy to determine whether it is achieving its desired effect of encouraging compliance.

Revenue Canada's response: The voluntary disclosure policy is currently under review by the Department for the purpose of developing a completely harmonized disclosure policy for all business lines.

Conclusion

36.75 The systems and procedures for processing and auditing New Housing Rebate claims are designed to focus on claims that are perceived to present a high risk of non-compliance. However, the absence of reliable and timely management information makes it difficult to assess how effective these systems and procedures are in practice. Further, Revenue Canada has given limited attention to audits of builders other than "owner-builders".

36.76 Available data on a special project aimed at non-compliance with the self-supply rules applicable to builders of multiple-unit residential complexes indicate good success, and suggest that there may be value in expanding the project.

36.77 Revenue Canada and the Department of Finance need to continue monitoring evolving jurisprudence as it relates to the issue of ``house hoppers" in order to determine whether there is a technical problem with the wording of the legislation that would need to be remedied by way of amendment.

36.78 Revenue Canada, in consultation with the Department of Finance, needs to re-examine its voluntary disclosure policy.

About the Audit

Objective

Scope

Criteria

• providing clear, accurate and timely guidance to taxpayers/registrants explaining how they are to comply with the law;
• designing and implementing effective enforcement programs aimed at correcting and deterring non-compliance; and
• working with the Department of Finance to introduce technical amendments to the legislation in a timely manner.

Reliable and appropriate information should be available on a timely basis to enable management to administer tax measures.

Audit Team

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