Compliance Activities—Canada Revenue Agency

Opening Statement to the Standing Committee on Public Accounts

Compliance Activities—Canada Revenue Agency

(Report 7—2018 Fall Reports of the Auditor General of Canada)

10 December 2018

Jerome Berthelette
Assistant Auditor General

Mr. Chair, thank you for this opportunity to discuss our fall 2018 report on compliance activities of the Canada Revenue Agency. Joining me at the table is Martin Dompierre, who was the Principal responsible for the audit.

Part of the Agency’s mandate is to ensure that taxpayers comply with the income reporting requirements of the Income Tax Act. The Agency aims to protect the integrity of the tax system by identifying and deterring those who do not comply.

We found that the Canada Revenue Agency inconsistently applied tax rules when it audited or reviewed taxpayers’ files, even though the Taxpayer Bill of Rights requires the Agency to apply the rules in the same way to taxpayers in similar situations.

There were a number of reasons for these inconsistencies. In some cases, the judgment of Agency staff conducting compliance activities resulted in inconsistent treatment of taxpayers in the same situation.

For example, if the Agency caused delays in conducting compliance activities, it had the discretion to charge interest and penalties to the taxpayer or to waive them. We found that some of the Agency’s auditors waived interest and penalties for the time it took them to get information from the taxpayer’s banks. Other auditors charged interest and penalties because they considered that time to be the taxpayer’s fault for not providing the information. These discretionary decisions resulted in inconsistent treatment of taxpayers in the same situation.

According to the Agency’s own internal audit, the Agency waived penalties and interest differently, depending on where the file was processed. Moreover, staff from different program areas considered different criteria for similar situations when granting requests for taxpayer relief.

We also found that the Agency waived $17 million in interest and penalties, despite the fact that the taxpayers were identified as at risk for non-compliance and were undergoing an audit at the time they asked for relief.

We found regional inconsistencies in file reassessments. Taxpayers in one region waited an average of 7 months longer than those in another region for the Agency to complete an audit. In one region, the Agency took over 40 weeks to process a taxpayer’s request for an adjustment, whereas in another region, it took 12 weeks.

We also found differences in how the Canada Revenue Agency treated taxpayers, depending on how the Agency classified them. The Agency had different compliance programs for individuals, small or large businesses, and taxpayers with offshore investments. Because each program had different compliance procedures, not all taxpayers were treated consistently. For example, the time the Agency gave a taxpayer to comply with a request for information, and whether or not the Agency offered the taxpayer some relief from penalties and interest, depended on the type of taxpayer.

Each year, the Canada Revenue Agency sets targets for additional revenues from compliance activities. For the 5-year period we examined, we found that the targets increased each year and were almost always met or exceeded. This may mean that the targets were set too low. At some point, targets should be harder to achieve and should start to decrease if the Agency’s compliance activities effectively promote taxpayer compliance. Yet the Agency could not explain why its targets continued to rise and were always met or exceeded.

Finally, we found that the additional revenue the Agency reported as a result of its compliance activities did not reflect the taxes actually collected. This discrepancy occurred because in its calculation of additional revenue, the Agency measured results only partway through the revenue cycle. Therefore, results from additional revenues did not take into account the taxpayers who filed objections with the Agency or who appealed through the court system.

In most cases, these taxpayers were successful and therefore did not pay the taxes in dispute. In other cases, the Agency was unable to collect taxes because the taxpayer was unwilling or unable to pay, and the Agency wrote off the taxes owing. Without accounting for objections, appeals, and write-offs, the Agency’s calculation of additional revenue was incomplete.

We are pleased to report that the Canada Revenue Agency has agreed with all our recommendations, and we understand that it has prepared a detailed action plan.

Mr. Chair, this concludes my opening remarks. We would be pleased to answer any questions the Committee may have. Thank you.