Audit at a Glance—Report 3—Tax-Based Expenditures

Audit at a Glance Report 3—Tax-Based Expenditures

What we examined (see Focus of the audit)

This audit examined whether the Department of Finance Canada, with the support of the Canada Revenue Agency and consistent with their respective roles and responsibilities, properly manages tax-based expenditures. We also examined whether the Department of Finance Canada reported clear and useful information on tax-based expenditures to support proper scrutiny by Parliament and Canadians.

Why we did this audit

This audit matters because important programs are delivered through the tax system, and the resulting tax-based expenditures could account for tens of billions of dollars annually. Furthermore, Parliament requires complete information on tax-based expenditures to exercise adequate oversight.

What we concluded

While the Department of Finance Canada had appropriate practices to analyze new tax measures, to monitor existing tax-based expenditures, and to share information with the Canada Revenue Agency, overall we concluded that the Department fell short on managing tax-based expenditures. We reached this conclusion because these expenditures were not systematically evaluated and the information reported did not adequately support parliamentary oversight.

What we found

Informing Canadians on tax-based expenditures

Overall, in our opinion, information provided by the Department of Finance Canada on tax-based expenditures does not adequately support parliamentary oversight. Some information that is available for direct program spending is not available for tax-based expenditures. For example, the report does not include future cost projections. Also, experience abroad provides examples where additional details related to tax-based expenditures are disclosed or reported in a consolidated manner. We consider these examples to represent good practices.

This finding matters because a properly designed tax expenditure report is critical to provide parliamentarians and Canadians with comprehensive and consolidated information on tax expenditures and what these expenditures are accomplishing. Also, in our opinion, Parliament requires comprehensive and consolidated information to effectively exercise its oversight of tax-based expenditures and understand total government spending.

Analyzing proposed tax measures

Overall, we found that when analyzing tax-based expenditures before they were implemented, the Department of Finance Canada considered most key elements of its analytical framework, such as the need for government intervention, and efficiency, effectiveness, and equity. Analyses on potential tax measures are prepared to support the decision-making process. It is therefore important that the Department analyze tax measures consistently.

Evaluating existing tax-based expenditures

Overall, we found that the Department of Finance Canada monitored all selected tax-based expenditures. However, the Department did not systematically evaluate all tax-based expenditures. Also, evaluations prepared by the Department were generally not published.

We found examples where the Department of Finance Canada identified issues in relation to certain tax measures before implementing them. Despite those issues, the Department had yet to evaluate these tax measures.

Regular evaluations of all tax-based expenditures are important, since circumstances leading to their implementation can change. For example, according to the Department, measures that were implemented to support a declining economy should be reviewed when macroeconomic conditions improve.

  • The Department of Finance Canada does not systematically evaluate all existing tax-based expenditures

    Recommendation. The Department of Finance Canada should conduct systematic and ongoing prioritized evaluations of all tax-based expenditures, similar to what all departments and agencies are required to do for direct program spending. These evaluations should include

    • assessing the measure’s ongoing relevance and appropriateness;
    • determining whether the tax system is the most effective and efficient way to meet policy objectives and deliver outcomes; and
    • establishing whether to abolish, modify, replace, or retain the tax-based expenditure.

    Recommendation. Similar to the reporting requirements for direct program spending evaluations, the Department should publish, in a timely manner, pertinent information for all tax-based expenditure programs that have been evaluated to facilitate consideration by parliamentarians and Canadians of the ongoing relevance and performance of tax-based expenditures.

Monitoring costs and sharing information

Overall, we found that the Canada Revenue Agency monitors costs to implement new measures, including the impact of the measure on provincial or territorial administrations, on its own internal operations, or on its publications. It also monitors compliance issues and shares relevant information with the Department of Finance Canada on an ongoing basis.

This finding is important because policy makers need to consider administrative costs and compliance issues when making decisions about tax policies. The ongoing exchange of information, on a timely basis, is critical to ensure that tax-based expenditures are designed properly and minimize administrative costs and compliance issues.

Entity Responses to Recommendations

The audited entities agree with our recommendations, and have responded (see List of Recommendations).

Related Information

Report of the Auditor General of Canada
Type of product Performance audit
Audited entities
Completion date 22 January 2015
Tabling date 28 April 2015
Related audits  

For more information

Media Relations
Tel.: 1-888-761-5953

Twitter: OAG_BVG

The Auditor General’s Comments

Spending through the tax system is subject to less scrutiny and oversight than other government spending
Large video and transcript