PACC Committee Report

The Standing Committee on Public Accounts has considered Chapter 32 of the December 1997 Report of the Auditor General of Canada (Revenue Canada and Department of Finance --- Understanding Changes in Tax Revenues: GST) and the Committee has agreed to report the following:

The ability of the Federal Government to fully account for tax revenue fluctuations is critical for the identification of errors and increases its awareness of new economic trends. It also enhances the credibility of the Government’s financial reporting to Parliament and improves its ability to forecast tax revenues, budgetary deficits and borrowing requirements.

The Auditor General has observed that monthly Goods and Services Tax (GST) revenues fluctuated significantly over time and with no apparent pattern. It was further noted that GST revenues for the year ended 31 March 1996 turned out to be $800 million lower than the 6 March 1996 Budget forecast, and $400 million lower than the previous year’s actual revenue. The Auditor General is of the opinion that Revenue Canada and the Department of Finance ought to be better able to understand and explain such fluctuations in tax revenue streams.

Because of the importance to the Federal government of being able to fully account for and explain revenue fluctuations, the Committee decided to examine Chapter 32 of the Auditor General's December 1997 Report. Accordingly, on 17 March 1998 the Committee met with Mr. Denis Desautels (Auditor General of Canada), Mr. Shahid Minto (Assistant Auditor General), Mr. James Ralston (Principal, Audit Operations), Mr. Scott Milne (Principal, Audit Operations) and Ms. Basia Ruta (Principal, Audit Operations) from the Office of the Auditor General. The following represented Revenue Canada: Mr. Robert A. Wright (Deputy Minister), Mr. Dan Tucker (Assistant Deputy Minister, Finance and Administration Branch), Mr. John Kowalski (Director General, Audit Directorate), Mr. Bill Boston (Director General, Financial Administration Directorate, Financial and Administration Branch), Mr. David Miller (Assistant Deputy Minister, Assessment and Collections Branch), Mr. Brian Brimble (Interim Director General, Operational Policy and Co ordination Directorate, Customs and Trade Administration Branch), Mr. Paul Godden (Interim Director, Program Support Division, Operational Policy and Co ordination Directorate) and Mr. Stephen Rigby (Director General, Corporate Affairs Branch). Mr. Peter DeVries (Director, Fiscal Policy Division) and Mr. Paul-Henri Lapointe (Assistant Deputy Minister, Fiscal and Economic Policy) represented the Department of Finance.

The Auditor General informed the Committee that the total GST revenues collected for the year ending 31 March 1996 was the $800 million less than the amount predicted by the 6 March 1996 forecast, and $400 million lower than the previous year actual revenue. The Auditor General mentioned the Department of Finance and Revenue Canada’s attempt to identify the contributing factors responsible for the GST revenue shortfall and concluded that both Department failed to provide a conclusive and adequately documented explanation.

The Auditor General believes the federal government’s ability to ascertain the cause (or causes) responsible for revenue fluctuations can be improved if it follows an appropriate five step process for analysing movements in revenue streams. The audit found that the Department of Finance and Revenue Canada did not follow this process to the minimum extent required, nor did they make use of all available data. Some of the unused data were considered unreliable.

The Auditor General also mentioned other items that were affecting the analytical capability such as a need for a better co-ordinated effort within Revenue Canada; the limited amount of information reported on GST returns; and the way Revenue Canada records figures for "GST declared" and "input tax credits".

The Assistant Deputy Minister of the Department of Finance, Mr. Paul-Henri Lapointe, while agreeing with the Auditor General’s recommendations for improving the timeliness and the reliability of GST data, nonetheless disagreed with the Auditor’s assessment that the analysis was inconclusive and that both Departments failed at carrying out the appropriate analytical process. Finance’s analysis pointed to several factors which could have contributed to the forecast variance. First, economic data used for analytical purposes come with considerable time lags and are subject to revisions well after the fact. This alone was estimated to represent $500 million of the $800 million GST revenue shortfall. Second, Revenue Canada identified a further $245 million of the shortfall that was due to bookkeeping adjustments. Finally, other contributing factors identified were time lags between receipt of GST collections and payments of refunds and rebates, and changes in receivables.

In his opening statements, the Deputy Minister of the Department of Revenue, Mr. Robert Wright, did not make any specific statements on GST revenue fluctuations with the exception that the Revenue Canada will continue to collaborate with Finance in the Fiscal Monitor Committee to address revenue analysis issues (1545). When the Committee members questioned Mr. Wright about Revenue Canada’s adherence to the five step analytical process, the witness responded that Revenue Canada generally followed the recommended five step process (1625) and mentioned an offer to collaborate with the Auditor General towards improving the Department’s execution of the analytical process. Revenue Canada’s Director General of the Financial Administration Directorate, Mr. Bill Boston, concurred with Mr. Wright’s statements, that Revenue Canada substantially, but not fully, followed the recommended process. While the Committee recognises Revenue Canada and the Department of Finance’s efforts at fully accounting for revenue changes, it agrees with the Auditor General that closer adherence to the recommended process will enhance each Department’s ability to analyse revenue streams. Therefore, the Committee recommends:

The Auditor General mentioned in his report on the importance of improving the reliability and the timeliness of the data, and making better use of them would improve Revenue Canada and Finance’s ability to analyse GST movements, it may not be enough. Additional registrant information might be required (32.35). The Assistant Deputy Minister of the Department of Finance, Mr. Paul-Henri Lapointe, agreed with the need to improve the reliability and timeliness of tax data but this requirement had to be balanced against the need to minimise any additional burden to the tax registrant. Committee members expressed similar reticence at imposing additional cost and administrative burden to registrants. Mr. Shahid Minto, Assistant Auditor General, agreed with the concerns expressed by the Committee and proposed one way of obtaining supplementary information without adding to registrant burden. The method consists of simply amending the GST return form (1645) so that the information contained in the working copy is transferred to the detachable portion of the form that is submitted to Revenue Canada (Exhibit 32.3) This leads the Committee to recommend:

In a related question, the Committee enquired if Revenue Canada had enough information to administer the GST. In response, the Department’s Deputy Minister, Mr. Robert Wright, assured the Committee that it had sufficient data to administer the GST and would like enough information to carry out cross checks to improve data reliability but did not recommend asking for additional information from taxpayers for purely analytical purposes. Mr. Wright went on to say that the current re-engineering of processes at Revenue Canada, which includes the standardisation of accounting systems, expected to be concluded by year 2002, and the move towards accrual basis of accounting, will provide further opportunities to improve monitoring and analysis of revenue streams. The Committee therefore recommends:

The Committee also enquired about the level of co-ordination between Finance and Revenue Canada in terms of analysing GST revenue fluctuations and whether both Departments has similar co-ordination arrangements for other revenue streams (1640). The Department of Finance’s Deputy Minister, Mr. Paul-Henri Lapointe, assured the Committee that both Departments work closely together in analysing all revenue streams through their Fiscal Monitor Committee. Furthermore, there are regular consultations with their provincial counterparts to assess the current fiscal situation of the provinces as well to identify events that might have serious impacts on national revenue. In light of this, the Committee recommends:

The Committee shares the concerns expressed by the Auditor General concerning Revenue Canada and Finance’s ability to thoroughly analyse GST revenue fluctuations. While recognising the continued efforts of both Departments in explaining changes to revenue streams, it is felt that further action on their part could be pursued in order to assure the completeness of the analysis. Particularly, both Departments should follow more closely the five-step process the Auditor General recommended for analysing GST revenue movements. Moreover, to the extent that revenue analysis is still hampered by unreliable and untimely data, Finance and Revenue Canada should therefore continue to develop better processes in obtaining, verifying and validating the required information.

The Committee appreciates the forthrightness of the witnesses from the Departments of Finance and Revenue, and commends them on their willingness to take action on the concerns and recommendations of the Auditor General.

The Committee is confident that the adoption of its recommendations and those of the Auditor General will assist Revenue Canada and Finance in its efforts to improve their joint ability to fully analyse revenue fluctuations.

Pursuant to Standing Order 109, the Committee requests that the Government table a comprehensive response to this Report.

A copy of the relevant Minutes of Proceedings (Meetings Nos. 22 and 31) is tabled.

Respectfully submitted,

JOHN WILLIAMS