Office of the Auditor General of CanadaOAG reports published in the past are available through Publications.gc.ca.

Canadian Tax Foundation 2002 Speech - Address given by Sheila Fraser, FCA, Auditor General of Canada - Prairie Provinces Tax Conference, Canadian Tax Foundation

Canadian Tax Foundation

Notes for an address by Sheila Fraser, FCA, Auditor General of Canada, 28 May 2002, Calgary, Alberta

It's a pleasure for me to be here today to share ideas with members of the Canadian Tax Foundation, which, I know, has been providing Canadians with expert, impartial research into current issues in taxation and government finance for more than 50 years. Thank you for inviting me today.

Although you work mainly in the private sector and my work is centred on the Government of Canada, one of our shared goals is to ensure a fair and efficient tax system.

The importance of Canada's tax system is easy to understand—taxes provide the revenue the government uses to fund programs and to service our accumulated debt.

The fairness of the tax system and the integrity of the tax base must therefore be carefully protected.

Today, I would like to talk to you about the role that the Auditor General plays in this regard.

Most of you know have probably heard a bit about the Office of the Auditor General in recent days. You may have seen me in the news a little lately...

To summarize my mandate briefly, the role of my Office is to audit government operations and to provide information that helps Parliament hold the government to account for its stewardship of public funds.

With a staff of more than 500 people and an annual operating budget of about $63 million, we audit most areas of the Canadian government. This includes about 70 federal government departments and agencies, about 40 Crown corporations, about 10 departmental corporations and about 60 other entities and special audits. In addition, we audit the governments of Nunavut, the Yukon and the Northwest Territories as well as some 15 territorial agencies.

In 1995, the position of the Commissioner of the Environment and Sustainable Development was created within the Office of the Auditor General. The Commissioner, Johanne Gélinas, and her staff play an important role in assessing the extent to which the federal government complies with environmental laws and meets its goals in the area of sustainable development.

To guarantee the independence of the Office from government, the Auditor General is appointed for a 10-year period and has the freedom to recruit staff and set the terms and conditions of their employment.

I also have the right to ask the government for any information required to meet the responsibilities outlined in the Auditor General Act. Moreover, I submit my reports directly to the House of Commons, through the Speaker.

In 1977 the mandate of the Auditor General was broadened significantly. In addition to looking at the accuracy of financial statements, we acquired the authority to conduct value-for-money audits that look at the economy, efficiency and effectiveness of government activities.

From time to time the Office is also called upon to investigate specific areas of government activity, as happened a few weeks ago. I'm referring to the three contracts awarded to a public relations firm by Public Works and Government Services Canada.

My investigation revealed extensive non-compliance with the law that applies to the government's financial transactions and with government policies and regulations.

Although it happens rarely, the Auditor General can refer matters to the RCMP's commercial crime unit when we believe it to be appropriate, which we did with the Groupaction contracts. We will also be undertaking a government-wide audit of advertising and sponsorship programs.

As you can see, the Auditor General has a very wide mandate—one that is becoming ever more complex as government changes its structures and practices to deliver programs and services to Canadians more rapidly and efficiently.

The Auditor General's role is an important one in our democratic system of government. Parliament, the government and the public service are the guardians of public funds entrusted to them for delivering programs and services to benefit Canadians.

A critical part of the confidence that people have in our democratic institutions is their belief that public funds are spent wisely and effectively.

There must be—and there must be seen to be—value for money spent, compliance with authority, and environmental stewardship. In a significant way, then, confidence in our national government depends on clear and timely accountability by the government for its performance.

My principal instrument for reporting are the reports I submit to the House of Commons. The Auditor General Act was amended in 1994 to provide for the production of up to four reports a year, one of which is the report of the Commissioner of the Environment and Sustainable Development.

Although our reports attract considerable attention when they are released, their long-term impact is really felt when they are examined by the House of Commons Standing Committee on Public Accounts.

The Committee bases much of its work on our reports. It holds hearings throughout the year, which I attend along with the audit team and senior public servants of the audited department. After the hearings, the Committee may report and make recommendations to the House of Commons.

In addition to the Public Accounts Committee, many other parliamentary committees hold hearings on our reports. The Standing Committee on Finance, which is well known to the Canadian Tax Foundation, is the one that normally shows an interest in the tax issues we report on.

Through the Auditor General Act, Parliament has given my office a unique role in helping to monitor the performance of our tax system, which provides the essential revenues to fund government services.

Let me explain how my office is structured to monitor the way government collects taxes. While other members of my staff pay particular attention to how the government spends money, three distinct audit teams are focussed on the collection of government revenues, which amount to more than $1 billion per day.

One team is responsible for auditing CCRA's financial statements. This is the normal attest audit function that we find in the private sector. The largest item on those financial statements is, of course, the tax revenues for the Government of Canada.

In addition to this work, the team also audits a financial statement of income taxes payable to the provinces and territories collected by the federal government on their behalf.

The other two teams are involved in value-for-money or performance audits of tax administration. One of the teams focusses on income tax issues and the other focusses on commodity tax and customs issues.

The main focus of our revenue audit work is, of course the Canada Customs and Revenue Agency. As you know, this is a large organization—with more than 40,000 employees working in over 750 different sites—which exerts a profound influence on the lives of all Canadians. It affects the social and economic well-being of their families and communities, the health and prosperity of their businesses, and the affordability of their social programs.

This influence flows from CCRA's mandate to collect revenues; to administer tax laws, both for the federal government and on behalf of most provinces and all territories; to administer trade policies and legislation; to provide border services and to make certain social and economic payments to individuals and corporations, such as child benefits.

Our audit scope for tax issues also extends to the Department of Finance, which, as you know, is responsible for federal tax policy and legislation. However, my mandate does not extend to provincial and territorial tax regimes.

Though tax collection is as old as Canada itself, CCRA is a young departmental corporation that came into being on November 1, 1999. I know that your association was actively involved in the consultation process leading up to the creation of CCRA and I have no doubt that your input was significant.

The Office of the Auditor General is part of the accountability chain put in place to ensure fairness and efficiency on the part of the Agency: the Minister of National Revenue is accountable to Parliament, a corporate business plan is submitted to the Minister for Treasury Board approval, and the Minister submits an annual report on operations to Parliament.

As I mentioned, my office audits the Agency's books and the Agency's work. We also provide an assessment of the performance information included in the Agency's annual report. This is a new role—and a somewhat unusual one—since we do this for only two other federal entities.

One of the objectives of the restructuring of Revenue Canada into CCRA was to infuse new flexibility into the tax process, to lower administrative costs and to reduce overlap and duplication for Canada's small businesses.

Another reason for setting up the new Agency was to give management more flexibility in its human resource practices so that it could attract and retain the people it needs to deliver its programs in a fair, consistent and timely manner.

My mandate requires me to bring to the attention of Parliament any cases in which I have observed that the rules and procedures applied have been insufficient to secure an effective check on the assessment, collection and proper allocation of revenue. Over the last 14 years, we have conducted no less than 50 separate audits of various aspects of tax administration.

To mention just a few, we have examined:

I know that many of you are interested in how we select the issues we audit and how we ensure quality in our reports. This is indeed a crucial aspect of the audit process, made even more challenging by limited resources and an unlimited audit universe.

In our "tax audit practice," we survey the environment to identify areas that present a high risk to the tax base. We do this by speaking with stakeholders— including tax professionals, government officials and parliamentarians—monitoring tax publications and media articles, taking courses and attending conferences such as this one.

All potential audit projects are reviewed by the Executive, which has the final say on whether a project will proceed.

In addition to recruiting and retaining people who have both integrity and the necessary competence to carry out our professional work, we provide for their ongoing professional development.

We also make a point of supplementing our own staff with specialists and experts on contract. In tax audits, for example, we often retain tax experts to carry out specific tasks for us.

Technical issues are always vetted by competent external experts. In passing, I would like to mention that if any of you are interested in lending your expertise to the Auditor General's Office, I encourage you to apply directly through our Consultants Self-Registration System on our web site.

A key quality control feature is our audit advisory committee—a requirement for each audit. The Advisory committee consists of internal and external members. The external members are experts in their fields and are selected on the basis of their ability to contribute to the audit. In this way, we strive to bring a mix of views to the table so that we get balanced advice.

Advisory committees help us take a consistent, high-quality approach to our work, by guiding, reviewing and challenging the work of the audit team over the life of the audit. They also provide a forum in which the audit team can present plans, findings, conclusions and recommendations, and discuss difficult, ambiguous or contentious issues and alternative reporting strategies.

In this manner, over the years we have audited several CCRA programs that have protecting the tax base as at least one of their aims. In all these programs we found opportunities for improvement and we reported these to Parliament. At the same time, we did not find significant risks to the tax base that had not been addressed to some extent by the Agency or its predecessor, Revenue Canada.

One of the key issues we addressed in our reports is information, or more correctly, the lack of information available to Parliament on tax expenditures. Tax expenditures are deductions and tax credits designed to encourage particular taxpayer behaviour and are a substitute for direct spending programs. The R&D tax credit and RRSP deductions are examples.

Parliament receives a great deal of information on direct spending programs but very little on tax expenditure programs. It is difficult, if not impossible, for Parliament to hold the government accountable for spending through the tax system when it does not have proper information.

We also highlighted Revenue Canada's difficulty in finding enough people with specialized expertise especially in international tax positions at senior levels, which are rare and are also in demand in the private sector.

We found that weaknesses in human resource management, coupled with the often cumbersome human resource management rules in the public service, had resulted in long delays in staffing positions, which posed a risk to the department's ability to do its job properly.

Human resource problems are far from the only ones noted by my Office.

While the ability of the CCRA to educate taxpayers about their obligations and to process their returns quickly and accurately has improved considerably over the years, we have been less impressed with the Agency's enforcement efforts.

Our reports in 1994 on GST enforcement, in 1996 on the tax avoidance program and the program to audit the largest corporations, and in 1999 on the Underground Economy Initiative all cited weaknesses in enforcement.

The Agency has taken steps to address them, but it still cannot show that its enforcement activities have improved compliance—their main objective.

An effective process for dispute resolution is a critical part of an effective tax system. The law provides for taxpayers to appeal if they believe the tax system has treated them unfairly. We are concerned about the Agency's ability to resolve these disputes quickly and fairly.

We reported in 1993, for example, that Revenue Canada and the Department of Justice had not properly managed the risks of litigation in the income tax provision for the resource allowance, a deduction allowed to mining and oil and gas companies (in lieu of the deductibility of Crown royalties).

The Crown had to refund over $1 billion in income tax and interest since 1994, because the provision did not clearly convey the government's intent. We audited the interdepartmental administration of the income tax system in 1998 and did find that the management of tax litigation risks had improved.

The Agency's handling of tax credit claims for scientific research and experimental development was the subject of an audit we reported on in 2000. We found that unresolved claims dating back to 1985 amounted to hundreds of millions of dollars. The claims had not been resolved because it was not clear whether particular projects were eligible for the tax credit. I think it is taking too long to resolve these disputed claims.

In my latest report, released on April 16, I noted that further improvements would help to ensure fairness and consistency. The Canada Customs and Revenue Agency has good systems and practices in place for writing off uncollectable taxes. This amounted to $1 billion for the fiscal year ended 31 March 2001. However, the Agency needs better controls to ensure fairness and consistency in forgiving interest and penalties.

Under certain circumstances, the Agency can waive or cancel all or part of any interest or penalty that a taxpayer owes. This amounted to an estimated $185 million for the fiscal year ended 31 March 2001.

Although the Agency has responded to the Auditor General's 1994 recommendations to improve its fairness, additional improvements could be made.

For example, the Agency does not record the amounts of interest and penalties it waives, or its reasons for waiving them. It does not review information about forgiveness decisions systematically at the national level to monitor and confirm whether the decisions are consistent.

Fairness is one of the fundamental objectives of our tax system, and fairness means treating all taxpayers consistently. To ensure that it does, I believe that the Agency needs to continue to improve its collection and analysis of information about the decisions it takes to forgive interest and penalties.

I'm sure that many of you are familiar with our 1996 audit observation that dealt with the movement out of Canada of at least $2 billion worth of assets held in family trusts.

The concerns we expressed arose out of a 1991 advance income tax ruling that allowed certain public company shares owned by a family trust resident in Canada to be moved out of Canada to the United States on a tax-free basis.

Although our report did not allege any wrongdoing, it resulted in court action—Harris versus the Queen and the Minister of National Revenue—which charged that in granting the advance tax ruling, the Crown had "bestowed an undue preference and special benefit" upon a particular taxpayer.

The Federal Court, Trial Division, found no evidence of wrongdoing, and Harris did not appeal this decision.

Some have charged that we overstepped our bounds by raising tax policy issues—what we were doing, however, was raising concerns about the administration of the Income Tax Act.

We expressed concern that in giving a favourable ruling on the transactions, the CCRA may have eroded the tax base by forfeiting a legitimate future claim to many millions of dollars in tax revenue.

As well, we pointed out a lack of documentation and analysis of key decisions made by the Agency. And, because the rulings were not made public when they were given, other taxpayers may have been denied a similar benefit.

In reporting on a tax issue such as this, we spend enormous time and energy deciding what information to put into the public domain. Keeping in mind that our role is to aid accountability, we must make sure Parliament has all the facts it needs to hold the government to account for the stewardship of public funds. At the same time we must respect the confidentiality rules of the Income Tax Act.

You may be interested to know more about a tax issue that has come to our attention fairly recently. In January of this year we were informed that CCRA had discovered an error in their internal financial recording of a specific aspect of Trust (T3) returns.

The error pertained to the omission from previously issued "Statements of Income and Capital Taxes Payable to the Provinces and Territories" of amounts representing the provincial portion of capital gains refunds earned by mutual fund trusts.

The problem appears to have originated in the design of the T3 Trust Tax Return and may go as far back as 1972. As a result, gross income taxes pertaining to mutual fund trusts were properly allocated to provinces but the related capital gains refunds were not.

While this has no direct effect on individual taxpayers, it does have an impact on the allocation of assessed income taxes between the federal and provincial governments. It resulted in higher tax-related payments to the provinces by the Government of Canada.

Several factors contributed to this problem. First, the error in CCRA's general ledger recording process occurred, then controls and reviews by CCRA and the Department of Finance did not reveal a problem, nor did our audit work.

Since an audit cannot look at every transaction, a process of selection must take place. Our recent audit work in this area focussed on changes in the general ledger systems and accounts.

We have been working closely with CCRA and Finance to verify the amounts involved. We are reviewing the recording of all other tax forms, as well as about 2,200 other general ledger accounts. This takes time.

Once the issue gets resolved between the federal government and the provinces, we will determine what other actions may be necessary in consultation with provincial auditors.

With respect to the omission of the amounts representing provincial capital gains refunds earned by mutual fund trusts from the Federal/Provincial Tax Sharing Statements prepared by the Canada Customs and Revenue Agency (CCRA), my Office has agreed to undertake audit procedures to do three things:

  1. verify the amount of the error,
  2. determine whether CCRA's accounting practices applicable to mutual fund trust capital gains refunds have been revised to ensure that a similar omission will not occur in the future, and
  3. help determine whether there are other CCRA accounting practices that have resulted or could result in material errors in the provincial assessed amounts included in the Federal/Provincial Tax Sharing Statements.

We expect to report the results of our work on the first two matters to the Minister of Finance by May 31 and on the third matter in June.

As one who is regularly put in the position of having to criticize some aspects of our public administration, I cannot end this presentation without noting the excellent work that is done by the overwhelming majority of federal public servants.

If Canada is respected and admired—envied even—around the world for the quality of life it affords its population, it is in a very large part because of the dedication and competence of generations of men and women who are devoted to the service of their fellow citizens.

I am also happy to be able to congratulate the Canadian Tax Foundation on its outstanding contribution to the public discussions of issues that matter to all of us.

Thank you.