PACC Committee Report

The Standing Committee on Public Accounts recommended:

Activities to promote voluntary compliance have always been a key part of the Department's balanced approach to addressing the underground economy. Revenue Canada undertakes numerous activities to promote voluntary compliance.

In particular, Revenue Canada considers its community visits to be an excellent opportunity to assist taxpayers in understanding and meeting their tax reporting responsibilities. In addition to leaving taxpayers with a package of information to help them comply voluntarily, staff offer to answer questions taxpayers might have and to provide assistance on-the-spot or shortly thereafter. Appropriate enforcement action is taken if a taxpayer has not complied after information and assistance have been provided.

Emphasis is being placed on increasing the number of annual community visits to 60. This would reverse the decline in community visits over the last couple of years and would restore these levels back to the 1995-1996 and 1996-1997 levels.

In addition, emphasis has also been placed on maintaining existing relationships with private sector associations as appropriate and on establishing new relationships.

Through partnerships with these associations, Revenue Canada and other government departments are well positioned to communicate with the general public and targetted groups on Underground Economy Initiative-related messages.

The Department has met with a number of stakeholders to explore interests and commitments. Public opinion research in the home renovation sector was conducted with the view to developing a social-marketing plan and other communication-related strategies for that sector, as well as for the general public.

A communications product is being considered which would be produced in partnership with associations, other federal government departments and provincial governments and delivered to all Canadian households. The message would relate to consumer protection, safety in the work place, and the risks for contractors and service providers being engaged in the underground economy.

The Department is planning additional research to gain further insights into how best to communicate about the underground economy. The aim is to:

• determine how Canadians respond to concerns regarding the underground economy and its impacts on social programs;
• determine whether a broad-based information campaign (as contemplated above) would be an effective way which will raise general public awareness of the underground economy and of what the Government and partners have been doing to deal with it, and, if so, what messages and media would have the most impact; and
• continue research on specific sectors, communication vehicles and messages in order to improve and expand its existing communications efforts targetted at sectors and related consumers.

Also, the social-marketing research being undertaken by the Department will provide useful information on the types of activities that are most likely to be effective in encouraging voluntary compliance.

Revenue Canada will also continue to work closely with other governments and other departments and to seek appropriate legislative improvements, where required.

The Standing Committee on Public Accounts recommended:

Revenue Canada agrees to report on community visits, significant developments with third-party partnerships, social-marketing efforts, legislative changes and other measures that balance our enforcement actions with education and facilitative activities in its annual Performance Report to Parliament starting October 31, 1999.

The Standing Committee on Public Accounts recommended:

The Department agrees that it should record and report the additional gross income and taxes identified by Underground Economy Initiative (UEI) enforcement activities. The system that is used to track and record the results of the UEI audits was modified early in this fiscal year to allow for both the identification of the additional gross income identified, as well as the total gross income reported for the fiscal year(s) under review. The additional tax due on the gross income identified will be extrapolated accordingly.

With respect to the additional gross income identified by non-initiative enforcement activities, this encompasses a significant amount of activities and programs, including small and medium enterprises and non-filer/non-registrant. Recognizing that modifications to systems can be costly and must be balanced against other departmental priorities, the Department will explore options to record the additional gross income identified by its non-initiative enforcement activities.

The recording and reporting of the reassessed additional taxes the Department collects is a complex issue. Outstanding accounts receivable result from a number of tax assessments including income tax, GST/HST (Goods and Services Tax/Harmonized Sales Tax) and source deductions. Such assessments can relate to unreported gross income, as well as to other adjustments. The net amount owing can be affected by various items such as the availability of loss carry forwards and carry backs and the assessment of penalties and interest. Furthermore, payment of taxes occurs in many ways including offsets and installments. Associating the source of the tax, or the specific type of adjustment relating to that tax, with a payment in respect to an amount owing would require a number of assumptions, as a direct linkage would not appear to be feasible.

Notwithstanding the complexity of matching as discussed above, Revenue Canada will also explore options to improve the reporting of collection activity in terms of how much of the additional taxes reassessed from underground economy activities is actually collected.

The Standing Committee on Public Accounts recommended:

Revenue Canada provided the Standing Committee on Public Accounts with a comprehensive list of the performance indicators currently in use to measure the impact of the UEI, as well as a list of the indicators planned to be introduced over the next two years, as part of the information package on the UEI that was submitted to the Committee on June 3, 1999.

With respect to reporting on the additional taxes assessed as a result of the additional gross unreported income identified through the Department’s UEI enforcement activities, as the Department notes in relation to Recommendations Three and Five, modifications made earlier this year to departmental reporting systems will enable the capture of this information which the Department will report to Parliament through its annual Performance Report beginning October 1999. With respect to the reporting on how much of the additional taxes assessed the Department actually collects, as noted in the June 3 submission to the Committee, the Department is exploring options on how best to accomplish this, recognizing that modifications to systems can be costly and must be balanced against other departmental priorities. The Department is striving to have necessary system changes in place by 2000, to be able to report on collection trends relating to accounts associated with the UEI.

The Standing Committee on Public Accounts recommended:

Revenue Canada agrees to inform Parliament on the continuing progress of the Initiative through its annual Performance Report to Parliament, starting October 31, 1999.

The Standing Committee on Public Accounts recommended:

Early in 1998, the Minister of National Revenue launched the Fairness Initiative geared at telling Canadians about the measures that the Department has already in place to ensure fairness; raising the profile of fairness; sparking meaningful discussion and getting comments and suggestions on how to improve the Department’s fairness. As part of the Department’s Fairness Initiative, a wide range of Canadians were consulted on what Revenue Canada could do to enhance its fairness. One of the messages from the consultations was the public’s concern about voluntarily approaching the Investigations area to make a disclosure. This concern was related not to the quality of the work done in Investigations, but to a wariness of approaching an area of an investigative nature. Because of the nature of the work in Appeals, clients said they would be more likely to approach Appeals Branch to make a voluntary disclosure.

The Fairness Initiative consultations resulted in the February 9, 1999, announcement of the document Setting a New Standard: A 7-Point Plan for Fairness. Point 6 of the plan outlines three steps to address the public’s concerns about the Voluntary Disclosure Program (VDP):

• transfer authority for the program from the Investigations Directorate of the Verification, Enforcement and Compliance Research Branch to the Appeals Branch;
• consult with internal and external stakeholders to clarify and enhance the rules and the process; and
• announce the newly developed policy.

Step one has been addressed with the April 6, 1999, transfer of the VDP from Investigations to Appeals. The transfer was given priority for three reasons:

• to address the public’s concerns about impartiality and fairness;
• to give Appeals an opportunity to conduct a hands-on review of the benefits and shortcomings of the current policies and processes; and
• to allow Appeals to build a base of expertise in the program before beginning the consultations.

Step two is scheduled to be addressed in the fall of 1999, once formal consultations on the program begin. Step three is scheduled to be addressed no later than March 31, 2000, through a public announcement of our new voluntary disclosure policy.

Consultations will likely include discussions with the field, questionnaires to the public, and the creation of two joint task forces, one for tax and one for customs.

The task forces will involve tax and customs professionals from the Appeals Advisory Committee and/or other Revenue Canada committees, field representation from Assistant Director of Appeals and assistant directors of Investigations, and Headquarters (HQ) representation from various branches.

The Standing Committee on Public Accounts recommended:

Revenue Canada agrees to provide information on the progress of these initiatives in its annual Performance Report to Parliament, starting October 31, 1999.

The Standing Committee on Public Accounts recommended:

When Revenue Canada appeared before the Standing Committee on Public Accounts in May 1999, the new foreign income verification rule, which requires that taxpayers report specified foreign assets over $100,000, was discussed along with the penalties for failing to comply with this reporting requirement. The foreign income verification rule, which was proposed in the 1995 Budget, came into effect beginning with the 1998 taxation year.

In its Twenty-Ninth Report, the Committee has recommended that Revenue Canada review and clarify its position concerning the application of these penalties to ensure they are applied equitably and consistently.

To ensure compliance with the reporting requirement, there are significant penalties for failure to comply. These penalties are separate from the existing penalties for underreporting of income.

There is a penalty for simple late filing of the information return and a penalty if the return is intentionally not filed for up to 24 months. The most severe penalties are for willful non-compliance and are determined based on the "cost of assets" at the time of purchase. These penalties are applicable in cases of intentional non-filing of the information return for more than 24 months and for intentionally reporting false information on the information return. Both penalties require the Department to prove the non-compliance was done "knowingly or under circumstances amounting to gross negligence".

Revenue Canada’s strategy to implement the new rule on reporting specified foreign assets over $100,000, as announced by the Minister in August 1998, already provides for the review of the penalty provisions to determine whether or not they are required. The Minister of National Revenue announced that the measures to improve foreign income verification, including the five percent penalty on the cost of assets for intentional non-filing or reporting of false information, would be reviewed based on analysis of the first two years of filing. The Minister also indicated that, during the two-year review period, Revenue Canada would emphasize educational and outreach activities to maximize voluntary compliance.

As explained above, the decision to proceed with or repeal the penalties will only be made after the Department has acquired and analyzed two years’ experience of filing under the new rules. The due date for the first filing of the information returns relating to specified foreign assets has now passed and the Department has commenced its review of this reporting requirement. This review will continue as the second filing of these returns is completed in the spring and early summer of 2000, after which the Department will come to a decision as to the merits of proceeding with the imposition of penalties.

The report is available on the Parliamentary Internet Site at WWW.PARL.GC.CA