PACC Committee Report
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GOVERNMENT RESPONSE TO
THE TWENTY-THIRD REPORT OF THE
STANDING COMMITTEE ON PUBLIC ACCOUNTS
CHAPTER 7 OF THE DECEMBER 2001 REPORT OF THE AUDITOR GENERAL OF CANADA (CANADA CUSTOMS AND REVENUE AGENCY – INTERNATIONAL TAX ADMINISTRATION: NON‑RESIDENTS SUBJECT TO CANADIAN INCOME TAX)
Government Response to the Twenty–third Report of the Standing Committee on Public Accounts - Chapter 7 of the Auditor General’s December 2001 Report (Canada Customs and Revenue Agency‑International Tax Administration: Non‑Residents Subject to Canadian Income Tax).
Recommendation No. 1
The Standing Committee on Public Accounts recommended:
That the Canada Customs and Revenue Agency include in its report on plans and priorities a section on relevant international tax treaty issues, incorporating the number of treaties currently under negotiation, detailing the relevant issues and challenges, and, if possible, provide an estimation on the amount of un-assessed non-resident income and that the Agency begin to report for the fiscal year ending 31 March 2003.
The Canada Customs and Revenue Agency (CCRA) agrees to begin to report, in part, for the fiscal year 2003-2004, in the manner recommended.
The CCRA will undertake reporting on methodologies, tools and strategies used to identify and challenge offshore tax planning arrangements. The CCRA will also undertake to report on the number of treaties that it administers and those under negotiation. For the purpose of this report, the CCRA understands non-resident income to be income earned offshore by residents of Canada, and as such, the CCRA will also report on the tax-at-risk in identified cases involving the use of offshore tax planning arrangements. The CCRA will begin to report in the Corporate Business Plan for the fiscal year 2003-2004.
The CCRA’s primary role with respect to tax treaties is administrative. The CCRA provides advice to the Department of Finance when problems arise in administering provisions of a treaty or when a proposed tax treaty is under negotiation. Once negotiations are underway, the CCRA works closely with the Department of Finance to ensure that its concerns are addressed. It is the responsibility of the Department of Finance to consider entering into negotiations to amend a treaty.
The negotiation of tax treaties, as with any negotiation, is a delicate balance of give and take. Reporting on unresolved issues in the context of treaty negotiations is inappropriate and could cause harm to Canada’s position at the negotiating table.
Finally, identifying and reporting on perceived shortfalls in treaties would inhibit the Government’s ability to enforce compliance, protect the integrity of the Canadian tax base and respect confidentiality.
Accordingly, we will begin to report, in part, in the Corporate Business Plan for the fiscal period 2003-2004.
Recommendation No. 2
The Standing Committee on Public Accounts recommended:
That the Canada Customs and Revenue Agency include in its departmental performance report to Parliament a section on relevant international tax treaty issues, incorporating the number of completed treaty negotiations with a discussion on resolved and outstanding treaty issues that will require further negotiation, and provide the total amount of non-resident income tax collected together with the total un-assessed non‑resident income. That the Agency begin to report for the fiscal year ending 31 March 2003.
The CCRA agrees to begin to report, in part, for the fiscal year ending March 31, 2003, in the manner recommended.
The CCRA will undertake reporting on methodologies, tools and strategies used to identify and challenge offshore tax planning arrangements. The CCRA will also undertake to report on the number of treaties that it administers and those under negotiation. As with recommendation No. 1, for the purpose of this report, the CCRA understands non-resident income to be income earned offshore by residents of Canada, and as such, will also report on the tax-at-risk and amounts reassessed in identified cases involving the use of offshore tax planning arrangements. The CCRA will also report the amount of tax collected from non-residents who earned income in Canada.
Finally, as with recommendation No. 1, reporting on unresolved issues in the context of treaty negotiations is inappropriate. For this reason, the Government cannot report on them.
Accordingly, the CCRA will begin to report, in part, for the fiscal year ending March 31, 2003.
Recommendation No. 3
The Standing Committee on Public Accounts recommended:
That the Canada Customs and Revenue Agency table to the Standing Committee on Public Accounts a report on its review of non-resident compliance, together with its action plan and implementation timetable. That the Agency be requested to table the report, action plan and implementation timetable no later than 31 December 2002.
The CCRA agrees to table its report by the date requested and in the manner recommended.
As identified by the Auditor General (AG), the International Tax Directorate (ITD) conducted a study to review the level of the compliance with the withholding tax requirements of non-residents providing services in Canada. This study was provided to the AG to demonstrate how the CCRA is active in pursuing ways in which to improve and enhance the compliance and enforcement measures in dealing with non-residents providing services in Canada. The purpose of this study was to review and report on the non-resident tax compliance provisions with respect to the withholding, remitting, filing and reporting obligations of both the payers and the non-resident persons providing services in Canada.
The study resulted in sixty-two (62) recommendations, including changes to compliance and enforcement policies, procedures, forms, public education/outreach and legislative amendment initiatives, along with enhancements to liaison and partnerships both internally and externally. Consultations were undertaken with the International Tax Advisory Committee, a joint CCRA and external party committee. The CCRA has implemented or is pursuing 51 of the 62 recommendations made in the study. The 11 remaining recommendations are issues that have been addressed through other avenues.
The CCRA is undertaking a multitude of compliance and enforcement initiatives, as noted above, both as a result of the Standing Committee on Public Accounts report and the AG report. A business case addressing the AG concerns, and other compliance requirements, is being developed for funding to enhance the non-resident compliance program.
The CCRA is committed to developing and expanding a performance-measurement system that will support aggregate planning, monitoring, and reporting. ITD has established a comprehensive program-monitoring plan for the international tax programs in the tax services offices. This is essential to achieving continuous process improvement. The ITD program‑monitoring plan will be used as an input mechanism for the performance-measurement system.
Additionally, there has been an increase in the field visits to tax services offices by Headquarters personnel in order to deal directly with individual case issues, thus providing for a more consistent approach.
ITD is raising the awareness about non-resident issues in the domestic audit programs of CCRA, which will strengthen our ties. In this regard, ITD is pursuing revisions to the audit protocols (referred to as “work plans” by the AG), which are designed to ensure that non-resident audit programs are carefully considered in other audit enforcement issues. The CCRA has also initiated a revitalization of the Non-Resident Audit Program in the tax services offices.
Policy and Procedural Updates
The CCRA is pursuing a number of on-going updates and revisions to policies and procedures for the field offices, including clarifications to the Non-Resident Audit Policy, the development of a Non-Resident Audit Course, a Waivers Manual, a Tax Haven Guide, a dispositions guide for International Audit and a Dispositions Training Course. An Information Circular, which provides information on the withholding, remitting, reporting, filing, and waiver processes and requirements under the Income Tax Act, is also being revised in order to clarify the CCRA’s position with respect to non-residents providing services in Canada.
In order to ensure that individuals are fully aware of the resulting tax implications when choosing to enter or leave Canada, revisions to and new releases on residency rules are also being developed. For example, an update to an Interpretation Bulletin for residency has been completed and corresponding revisions to the on-line system known as the Residency Determination Advisor System (RDA) have been made.
In response to the findings of the study conducted by the CCRA as mentioned earlier, the CCRA and the Department of Finance are currently reviewing the legislation relating to the taxation of amounts paid to non‑residents for services provided in Canada.
The CCRA consulted with the Department of Finance and the film industry to ensure that a consistent and fair approach to taxation was taken in addressing the compliance issues arising from certain non-resident actors’ failure to file Canadian income tax returns. These discussions led to new legislation being enacted for the film industry and resulted in the establishment of a dedicated film industry function, three film services units in the field and industry-specific waiver guidelines, thereby providing for the transparent application of the taxing regime for the film industry in Canada.
The CCRA is developing a computerized risk assessment system and database to identify and assess the risks of non-compliance related to the taxation of non-resident taxpayers in Canada. Field auditors will be able to use this system to select potential high-risk files based on a variety of selection options. The CCRA has also undertaken a project to determine where tax is at risk, how much is involved and how the compliance resources dedicated to non-resident activities actually detect and address non-compliance. This project will focus on non-filers as well as filers.
To enhance the CCRA’s ability to track non-residents who perform services in Canada, a new procedure has been developed. Non-resident businesses or individuals that apply for tax waivers are now required to apply for business numbers or identifiers, which are updated to the domestic compliance and enforcement systems and/or non-resident systems.
Additionally, ITD has initiated a Migration Screening Project which will prototype a screening mechanism to determine whether clients are in compliance with their obligation to report both realized and unrealized capital gains when they become non-residents, and also whether they have provided security to the CCRA instead of a tax payment. In addition, this project will identify non-compliance areas or trends in the reporting of realized and/or unrealized capital gains and enable the CCRA to take appropriate compliance or enforcement action. In addition, a migration database, together with new forms, are being developed to further enhance migration screening and compliance.
Identifying compliance gaps and taking appropriate enforcement action is an important part of the CCRA’s business. Along with routine enforcement of non-resident accounts, the CCRA is also pursuing improvements to its selection of income tax files to enhance compliance with tax filing for non‑residents. For this purpose, in April 2002, the CCRA formed a Compliance Projects Committee consisting of members representing non‑resident business lines.
The CCRA is continuing to develop administrative policies and procedures to ensure fair, consistent and equitable treatment for all taxpayers and will continue its consultations with stakeholders to assist in making administrative policies and procedures clearer and more relevant. The CCRA will ensure national consistency by continuing to provide functional direction and program support to tax services offices through its accountability framework and monitoring of program performance.
Accordingly, this overview has been provided in support of our undertaking to table our compliance report to the Standing Committee on Public Accounts by December 31, 2002.