Auditor General 2018 Fall Report Card on the Canada Revenue Agency

TAX CONTROVERSY

January 7, 2019

Auditor General 2018 Fall Report Card on the Canada Revenue Agency – What Does This Mean for You?

November 28, 2018

The Auditor General of Canada (AGC) recently released its independent report on the Canada Revenue Agency’s (CRA) performance relating to activities such as processing of audits and taxpayer requested adjustments. The AGC also reviewed Taxpayer Relief aspects (waiver of penalties and interest) as well as whether the CRA accurately reported the results of its compliance activities to Parliament.

Why was such an audit done? The CRA’s Taxpayer Bill of Rights outlines 16 taxpayer rights and is based on the Agency’s corporate values of professionalism, respect, integrity and collaboration. The Bill of Rights describes what taxpayers should expect when they interact with the CRA, and the purpose is to prevent taxpayers from being subjected to inappropriate treatment. One of the focuses of the audit was to ensure that the CRA’s practices are in line with these published rights.

The audit was also intended to measure the accuracy of the CRA’s reported compliance results in terms of fiscal impact. Budget 2016 and Budget 2017 provided the CRA with an additional $1 billion of resources to hire more auditors and specialists and otherwise increase verification activities. The CRA was expected to have a fiscal impact of an additional $5 billion over five years. Fiscal impact is made up of two components. The main component is the additional revenues generated from reassessments completed during compliance activities, which the Agency refers to as “tax earned by audit.” The second component includes other items such as interest and penalties.

The AGC focused its audit on whether the CRA applied the Income Tax Act consistently during compliance activities and whether it accurately reported the results of those activities. The consistency of application of compliance activities towards various types of taxpayers was also examined, as well as performance indicators and how they were measured, monitored and reported to Parliament. This is important, as the Bill of Rights gives all taxpayers the right to have the law applied consistently and to receive entitlements such as benefits, credits and refunds – and to pay no more or no less tax that what the law requires.

Time given to respond to CRA’s request for information

It was discovered that large inconsistencies existed in the length of time the CRA allowed taxpayers to respond to requests for information, depending on the category of taxpayer. Individuals with employment income were given much less time to respond to requests than other taxpayers such as international and large businesses or taxpayers with offshore transactions. These individuals were only provided 90 days to respond, after which time the Agency would close the file and deny the expense. For the other taxpayers, the time frame to respond to the request was extended for several months or even years. In some cases, no information was ever provided to the Agency, and the files were closed without any taxes assessed. The AGC noted in a prior audit that the longer it takes the CRA to enforce compliance, the less likely it is to collect taxes due, particularly in cases involving offshore assets.

Proactiveness of Agency in offers to waive penalties and interest

The AGC found that the CRA proactively waived interest and penalties for some taxpayers but not for others – even when the Agency itself had caused the delay in completing the file. The auditors also found that the CRA waived $17 million of interest and penalties for taxpayers that were identified as high-risk and were actually under audit at the time the waiver was requested. Again, it was noted that individual taxpayers were not proactively offered relief; however, small- and medium-sized businesses, international and large businesses and taxpayers with offshore transactions were more likely to be offered relief without requesting it.

Consistent waiver of penalties and interest

It was also discovered that the actual waiver of penalties and interest was inconsistent. Some auditors waived these for the period of delay in obtaining information from a bank; others took the view that this delay is the fault of the taxpayer and no relief was provided. Different policies appeared to be in place for different regions and staff in different program areas considered different criteria for similar situations when granting requests for relief.

Summary of Findings

• The CRA was inconsistent in application of the tax rules when auditing or reviewing taxpayer files. Reasons for these inconsistencies included: the judgement of the Agency staff conducting the activity, the region where the file was reassessed and the type of taxpayer (small business versus large corporation versus individual).
• The additional revenue the Agency reported from its compliance activities reflected taxes owed by taxpayers but did not reflect taxes it could not ultimately collect, either due to reversals through objections and appeals or by the inability to collect. The fiscal impact was therefore significantly less than what the CRA estimated.

Inconsistencies within the CRA

The CRA was found to treat taxpayers differently, depending on the type of taxpayer and the region. The AGC examined a number of factors:

• Time to complete audits across various regions: The AGC team found that there are marked differences in processing times for audits across the country. For example, in the offshore and aggressive tax planning sections, some taxpayers waited 323 days for audit completion; taxpayers in other regions waited a staggering 541 days. International and large business audits in some regions took 279 days versus 425 in others. The smaller the file, the more consistent the processing time.
• Processing of results of compliance activities: The AGC also found inconsistencies in the processing times for tax assessments. Once an audit is completed, the auditor sends the file to another section to process the adjustments and issue the assessments of taxes owing. One region’s tax centre took 12 weeks to process these; others took an average of 41 weeks. Note that the “interest clock” is still ticking during this time; yet taxpayers in some instances are not notified of their final assessments for almost an entire year after the auditor had completed their work.
  

Reporting Results

The AGC found that the CRA could not fully determine or quantify the results of its income tax compliance activities beyond the initial taxes assessed. Its calculation and reporting of additional revenues generated was incomplete and the Agency was unaware of how much monies had been written off as uncollectible or had been reversed in objections or appeals. Further, the Agency was unable to provide the AGC team with the source data it used in its revenue targets nor was it able to recalculate these targets. In fact, the AGC noted that the revenue targets were consistently exceeded, indicating that they were set too low.

The team also noted that the most audit files were closed between December and March of each year, which coincides with the CRA’s deadline to meet its annual targets for additional revenues by March 31. As the revenue calculations were not adjusted if assessments were overturned or monies not collected, these targets could incentivize auditors to close files early. As a result, the reports to Parliament of additional revenue generated by the CRA were overstated or inaccurate.

For example, the AGC found that at least $1.3 billion in previously reported additional revenues were never collected. Further, it was noted that 60 percent of decisions about objections to audits were fully or partially in favour of the taxpayers, in addition to those taxpayers who appealed through the court system which would reduce taxes owing as well.

Recommendations of the AGC

• Set time limits for all audit workloads and consistently enforce the provisions of the Income Tax Act once those limits have passed;
• Review its criteria and procedures for offering proactive relief to taxpayers and provide guidance to its staff about factors to consider when doing so;
• Ensure that taxpayers are treated consistently by clarifying its guidance and procedures for granting requested relief and ensure eligibility criteria are fully met before approving applications;
• Determine the reason for regional variations in completion times and implement a plan to reduce those differences;
• Develop a formal tracking process to monitor time to process assessments, take steps to improve timeliness and complete files and have a plan to follow up Voluntary Disclosure Program files;
• Clearly document how it sets targets for additional revenues, and
• Enhance performance indicators to fully measure and report on results and actual collected tax revenues.

The AGC put forward recommendations that the CRA should

The CRA fully agreed with all recommendations and has set various dates to implement them.

What do the report findings mean for you? It is difficult for taxpayers to deal with the CRA on their own without knowing what they should expect versus how they should be treated. There are many new and inexperienced auditors who may not be familiar with the CRA’s own policies, procedures and assessing practices.

How MNP Can Help

Our Tax Controversy Practice specialists can help you navigate the entire process, from receipt of the initial CRA inquiry to negotiating settlements, requesting penalty and interest relief and handling notices of objection if required. MNP’s Tax Controversy specialists have experience dealing with the CRA and its assessing procedures; their priority is to ensure that your rights are being respected and that your file is being handled in the most efficient and timely manner possible. Involving a specialist at the onset of the audit is the best way to ensure that the CRA operates within their outlined scope of review and is provided with only the most necessary information and / or documents to complete the audit with the least amount of disruption to you and your business.

For more information on how these report findings affect you and your business, contact your local MNP Advisor.