1999 or 2004  OAG Recommendation

2009 OAG Rating

Key findings from

March 2009 OAG Status Report

CRA Actions

March 2004:

5.32 Recommendation. The Canada Revenue Agency should ensure that all threats to the tax base are identified and considered in a consistent manner to support its allocation of available resources. It should consider implementing an overall risk management function or responsibility centre for risk management to achieve this.

2009 Rating: Satisfactory

Exhibit 3.1, p. 11

• The OAG found that the Canada Revenue Agency (the CRA) overall approach to compliance research needs more rigour:

• the CRA has not updated its formal Compliance Research Agenda;
• the CRA has not documented its evaluation of research proposals, and;
• the CRA has not tracked its use of research results.

• In addition, the CRA has not systematically tracked its progress on its 2004 action plan to address the Underground Economy (UE).

• The CRA finalized its annual 2008/2009 Compliance Research Agenda in early 2009.

• The CRA has established a new annual Compliance Research Agenda process. The new process documents the evaluation and prioritization of research requests, provides feedback of research into risk assessment and allows for improved communications.

• The CRA UE Steering Committee tracks its progress annually.

March 2004:

(Status report addresses only two of the three original sub-recommendations)

5.44 Recommendation. To better understand the compliance behaviour of small and medium enterprises and thus determine the right mix of compliance activities, the Canada Revenue Agency should do the following:

• strengthen the Core Audit Program by developing a multi-year plan to cover specific segments of the population, and set deadlines for the completion of the audit work and the analysis of results;

2009 Rating: Unsatisfactory

Exhibit 3.2, p. 12

• develop statistically valid estimates of the probable value of overstatements of GST/HST refund claims to develop a compliance strategy to minimize the overpayments; and

• capture additional information on audit results and analyze that information to gather additional insights into taxpayer behaviour, reasons for non-compliance, and methods of detection.

2009 Rating: Unsatisfactory

Exhibit 3.4, p. 16

• The OAG found that the multi year schedule developed by the CRA did not provide:

• details on the objectives of the Core (random) Audit Program (CAP);
• reasons for selecting particular segments;  and,
• a planned approach to the audits.

• The OAG also found that the CRA had difficulty coordinating the completion of the random audits and that there was a lack of buy-in by auditors conducting these audits.
• Furthermore, the CRA has not fully exploited the potential of this program in order to assess and report on the effectiveness of the CRA’s compliance program.
• Also, the CRA has completed its CAP reports for 2000 to 2005, although none were completed on time. The results of program audits for 2006 and 2007 have yet to be analyzed by the CRA.
• With respect  to capturing additional information, the OAG found that the CRA has not made much progress in capturing additional information on audit results and analyzing that information to gather further insights into the reasons for non-compliance

• The CRA is redesigning the Core Audit Program with the assistance of Statistics Canada. The redesign is targeted for completion by spring 2010.

• The results of the Core Audit Program for 2006 were analyzed by June of 2009. The analysis of the results for 2007 will be finalized by spring of 2010.
• The CRA is developing a new system that will increase availability of information to support analysis of audit results to help contribute to gather insight into reasons for non-compliance.
• The new system is targeted to be operational by the end of 2011.

March 2004:

(Status report addresses only the second of the two original sub-recommendations)

5.55 Recommendation. The Canada Revenue Agency should improve its systems to identify non-compliant small and medium enterprise taxpayers. In particular, the Agency should

• improve the Computer Assisted Audit Selection System by linking returns of taxpayer groups that do not operate at arm's length for the purpose of determining potential tax at risk and adding information to enable the calculation of income tax at risk for trusts and large partnerships, and
• undertake regular studies to validate the effectiveness of computer-based and manual risk evaluation systems.

2009 Rating: Unsatisfactory

Exhibit 3.3, p. 14

• The OAG was not able to determine if the analysis of research information and audit results is being used to update the systems.

• A process has been initiated to improve tracking of how research findings are being incorporated into our systems.

• The CRA continues to update and strengthen its risk assessment system to determine tax at risk by :
• using audit results to validate/improve its computer-based risk assessment and manual audit procedures;
• developing the above-mentioned new system.

• We are improving the use of the audit results to update the CRA’s risk assessment models.

April 1999:

2.63 Revenue Canada should improve the targeting and selection of income tax files to increase the effectiveness of its Underground Economy Initiative audit activities in identifying unreported income.

2009 Rating: Unsatisfactory

Exhibit 3.7, p. 21

The OAG found that :

• many of the files audited had not been designated as high-risk by the national computer system;
• those selecting files (screeners) are not required to document their decisions; therefore, the CRA does not regularly know the reasons for not selecting designated high-risk files;

• screeners need to have more confidence in the accuracy of the system’s risk estimates;

• the CRA has not developed national guidelines to help ensure that screeners select more high-risk files for audit; and,

• about 50 percent of the UE files audited did not involve unreported income.

• The CRA is redesigning its approach to targeting and selecting files where the greatest potential for non-compliance exists. Roll out of the new approach will begin in the spring of 2010.

April 1999:

2.50 Revenue Canada should reconsider its audit focus for the Underground Economy Initiative to include taxpayers in all sectors with a high risk of unreported income.

2009 Rating: Satisfactory

Exhibit 3.8, p. 22

The OAG found that the CRA:

·         lacks a documented rationale to support focus on hospitality and construction sectors, and;

• has not provided any formal guidance to the regions on how to select local UE sectors.

• The CRA recently completed a study on the construction industry and is finalizing a study on the hospitality industry. These studies support the CRA’s focus on these sectors.

• In addition, specific guidance to assist the regions on how to select local UE sectors will be issued in 2010.

April 1999:

2.37 Revenue Canada should strengthen its Underground Economy Initiative activities to promote voluntary compliance by businesses.

2009 Rating: Satisfactory

Exhibit 3.9, p. 23

The OAG found that the CRA:

• needs to measure the effectiveness and impact of the Underground Economy Initiative (UEI) activities.

The CRA acknowledges that establishing links between our UEI activities and taxpayer behaviour is difficult. The CRA continues to explore ways to measure the effectiveness of its UEI activities including doing pilot projects. For instance:

• The CRA is working with the Organization For Economic Cooperation and Development and other countries to identify ways to evaluate the effectiveness of compliance activities in influencing taxpayer behaviour.

• The Atlantic Region Underground Economy Initiative is taking a new approach to address the UE.  Researchers will measure changes in compliance rates over time. Results are expected in the spring of 2011.

• The Federal-Provincial-Territorial UE Working Group is undertaking a study to evaluate the impact on compliance of educating trades persons regarding their tax responsibilities. The study will be completed in 2011.

April 1999:

2.62 Revenue Canada should record and report the additional gross income identified by its Underground Economy Initiative and non-Initiative enforcement activities, the additional tax due on this unreported income, and how much of the reassessed additional taxes the Department actually collects.

2009 Rating: Unsatisfactory

Exhibit 3.11, p. 25

The OAG found that the CRA:

• now tracks the amount of additional gross income that is found in all audits of small and medium enterprises. However, this amount is not being published in the CRA’s Annual Report;
• reported an amount of additional taxes from UE audits in 2006-2007 that did not include taxes reassessed on any of the unreported income identified in other non-UE audits conducted in the small and medium enterprise sector.

• The CRA now includes the amount of unreported income identified from both its UEI and non-UEI compliance activities in its annual report.

April 1999:

2.70 Revenue Canada should develop indicators to measure and report the results of the full range of Underground Economy Initiative activities.

2009 Rating: Unsatisfactory

Exhibit 3.12, p. 28

The OAG found that:

• few indicators exist to measure the results of the CRA’s UEI;

• the CRA has not followed through on developing a number of indicators considered in 1999 that would have provided information on the effectiveness of the UEI activities, and;

• the CRA’s annual reports provide little information on the results of the UEI despite the CRA’s commitment to do so.

• The CRA recognizes that developing indicators to measure results of its UE compliance activities is difficult.
• The CRA is working with the Organization For Economic Cooperation and Development and other countries to identify ways to evaluate the effectiveness of compliance activities in influencing taxpayer behaviour.

• The CRA has started the analysis of indicators considered in 1999. Work is expected to be completed in summer 2010.
• The CRA is assessing the indicators currently in place and is looking for new indicators to measure and report the results of the UEI.
• The CRA has contracted with Statistics Canada to complete a study that will provide a measurement on the size of the UE.