PACC Committee Report

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INTRODUCTION

BACKGROUND INFORMATION

OBSERVATIONS AND RECOMMENDATIONS

CONCLUSION

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Pursuant to Standing Order 108(3)(e), the Standing Committee on Public Accounts has the honour to present its

SEVENTEENTH REPORT

The Standing Committee on Public Accounts has considered the Public Accounts of Canada 2001-2002, Volume II, Part II, Section 3 (Losses of Public Money or Property) and has agreed to report the following:

INTRODUCTION

Over recent months, media reports have signalled large amounts of fraud related to the goods and services tax (GST). The illegal activity in question is mostly in the form of individuals making false claims for GST rebates, otherwise known as “input tax credits.” Because GST registrants are not required to produce supporting documentation when filing for GST rebates, it is difficult for the federal tax authorities to identify fraudulent GST rebate claims; and for each case of fraud identified, there may be considerably more undetected illegal activity.

Section 79 of the Financial Administration Act gives the federal government regulation-making authority to prescribe, amongst other things, the manner by which losses of public funds should be reported in the Public Accounts of Canada. Treasury Board has chosen to prescribe these requirements by way of policy rather than regulation. The Treasury Board policy states that losses due to offences are to be reported in the Public Accounts, and that such offences include “false or fraudulent claims for social benefits, a grant, a contribution, or any program payment, including refunds or rebates.” Revenue Canada, Customs and Excise, took the position that GST fraud generally fell into this category and attempted to report necessary data on fraudulent losses.

Initially, all types of GST fraud were reported in the Public Accounts. In 1994-95, however, Revenue Canada (now the Canada Customs and Revenue Agency) ceased reporting the losses of public money due to fraud or wilful misrepresentation on the part of the public. Since that year, the Agency has reported only losses due to employee fraud in the Public Accounts.

The Public Accounts Committee is concerned about this reporting practice. To be able to hold the government to account, parliamentarians must be provided with complete, accurate and timely information. For much of this information, parliamentarians must rely upon accountability documentation prepared and provided by the federal government, such as reports on plans and priorities, performance reports and the federal government’s own consolidated financial statements, the Public Accounts of Canada. Without accurate information on government activities, parliamentarians cannot effectively acquit themselves of their responsibility to keep government accountable and transparent to Canadians. As a result, the Committee decided to hold a meeting on this matter. On 19 March 2003, the Committee met to consider the testimony of the following witnesses: the Honourable Elinor Caplan, Minister of National Revenue; from the Canada Customs and Revenue Agency, Mr. Rob Wright (Commissioner) and Mr. Stephen Rigby (Chief Financial Officer and Assistant Commissioner, Finance and Administration Branch); from the Treasury Board of Canada Secretariat, Mr. John Morgan (Executive Director, Financial Management and Accounting Policy Directorate, Comptrollership Branch); and from the Office of the Auditor General of Canada, Mrs. Sheila Fraser (Auditor General of Canada), Mr. James Hood (Principal) and Mr. Andrew Lennox (Principal).

BACKGROUND INFORMATION

Information regarding losses of public money and property is published in Volume II, Part II, of the Public Accounts of Canada. According to the Public Accounts Instruction Manual[1] (PAIM): “Every loss of public money or property, whether through an offence, illegal act or accident, shall be reported in the Public Accounts of Canada in the year in which the loss occurred. When a loss is discovered in a year subsequent to that of its occurrence, it must be reported in the year of its discovery. Any loss discovered in a previous year but not reported in the Public Accounts of Canada in the year of its discovery, must be reported in the current year’s Public Accounts of Canada as if it had been discovered in the current year. Every recovery against a loss of public money or property shall be reported in the Public Accounts of Canada in the year in which payment is received.”

When preparing information concerning losses of revenues due to fraud or wilful misrepresentation discovered or detected in the current year, departments and agencies must report these losses in the format prescribed by the PAIM, which includes the following items: brief description of the nature of the incident; total number of incidents; actual or estimated amount of the loss; amount recovered in the current year; amount not expected to be recovered; and amount expected to be recovered in subsequent years. The above information is required for incidents such as fraud or wilful misrepresentation when filing income tax returns, GST returns, customs declarations, etc.[2] It should be noted that the Office of the Auditor General does not audit information contained in Volume II, Part II, of the Public Accounts of Canada.[3]

In the past, the Department of National Revenue used to report losses of money according to revenue lines (i.e. customs and excise, taxation). In the Public Accounts of Canada 1990-1991, the Department stopped disclosing the amounts of money lost owing to fraud for the taxation revenue line, stating that its existing systems could not provide the information with respect to amounts recovered or to be recovered. In 1994-95, the customs and excise revenue line likewise ceased to report losses of revenue due to fraud, again stating that existing systems could not provide the required information. Since 1994-95, Revenue Canada and then the Canada Customs and Revenue Agency have reported only employee fraud in Volume II of the Public Accounts.

Revenue Canada also provided a further basis for its decision to cease reporting losses owing to GST fraud. The Department stated that, from the introduction of the GST in 1991 until 1994-1995, it had attempted to report necessary information on fraudulent losses. The Department claimed, however, that after some program experience with the tax, it had come to realize that the manner in which it reported losses was not in accordance with the policy requirements for disclosure. The policy requires that a fraudulent loss be reported in the Public Accounts for the year in which the loss was actually detected. Since virtually all losses were confirmed only through a court decision some months or years after the original loss was detected, the Department maintained that it was impossible to meet the policy requirement.

After consulting with the Treasury Board and obtaining the Board’s concurrence, the Department decided to discontinue its previous attempts at reporting losses of tax revenue arising from GST fraud. The decision was supported by the fact that aggregate information on tax write-offs was also disclosed in the Public Accounts and that the Department (now the Agency) provided substantial information to the public on fraudulent losses through its media bulletins at the time any loss was confirmed by court decision. Parliament, however, was not informed or consulted about the decision to report tax losses in this alternative fashion.

OBSERVATIONS AND RECOMMENDATIONS

Upon learning of these new reporting practices, the Public Accounts Committee contacted the Office of the Auditor General on 7 January 2003 to request its opinion on this issue. On 24 January 2003, the Office of the Auditor General reported back to the Committee and concluded that “…the government has not contravened the provisions of the Financial Administration Act in not reporting GST fraud in the Public Accounts. The requirement to report the losses is a Treasury Board policy and a requirement of PWGSC’s Public Accounts Instruction Manual. However, the CCRA has interpreted that policy in such a way as to only report employee fraud in the Public Accounts. It may be appropriate for your Committee to seek more detailed comment from officials of the TBS and the CCRA in considering the feasibility of reinstating the requirements to report losses due to GST fraud.”[4] On the basis of this advice, the Committee decided to arrange a meeting with the principals involved to further investigate and clarify the matter.

In her testimony before the Committee, Mrs. Fraser indicated that “while we agree that GST fraud cases can take years to settle, we note that the Treasury Board policy and the Public Accounts Instruction Manual provide guidance for these types of situations. The guidance states that such losses should be reported as soon as possible, but can be reported in a year subsequent to the one in which they were first discovered. Therefore, we believe that cases of fraud being pursued through the court system could be reported in the Public Accounts in accordance with this guidance.”

The Honourable Elinor Caplan, Minister of National Revenue, assured the Committee that the CCRA respected the Financial Administration Act and has always aimed at disclosing information in accordance with Treasury Board policy. The policy on reporting losses of public funds in the Public Accounts aims to give departments and agencies the flexibility they need to develop reporting practices appropriate to their business circumstances. The Minister confirmed that when the former Department of National Revenue merged its customs and excise business line with the taxation line, it re-examined the information appearing in the Public Accounts and, as a result, discontinued the practice of reporting losses arising from GST fraud as a separate item in that document.

Acknowledging that reporting practices in this regard can and must change, the Minister announced that the Agency, in collaboration with the Treasury Board of Canada Secretariat, has taken the Auditor General’s comments into consideration and developed a proposal for reporting GST fraud and other tax losses on an annual basis in the Public Accounts of Canada. The proposal is based on the requirement that departments and agencies report lost revenue due to fraud or wilful misrepresentation. Essentially, the information will be presented following the same basic layout prescribed by the Public Accounts Instruction Manual. Fraud losses will be first recognized when criminal charges are laid, and will be confirmed when convictions are obtained. The information will be presented in three separate tables in the Public Accounts: one showing convictions for fraud by revenue line for the current year; the second table presenting information on cases before the courts at the end of the current year; and the third table reporting amounts recovered as determined by the courts and reported on in previous years. The Committee considers this proposal as interesting and a concrete step towards improving the reporting of losses of public monies resulting from fraud or wilful misrepresentation by the public. It is important that the Agency report on a timely basis not only the amounts of fraud as determined by court decision but also the suspected amounts of fraud the CCRA has detected through its tax audit and investigation activities. Thus the Committee makes the following recommendations:

RECOMMENDATION No. 1

That the Canada Customs and Revenue Agency immediately start to prepare an action plan and implementation timetable for its proposal to report losses of tax revenue due to fraud or wilful misrepresentation in the Public Accounts of Canada, including estimates of total amounts of possible fraud by revenue line and total amounts of fraud confirmed by court decision by revenue line. That the Canada Customs and Revenue Agency submit a copy of its action plan and implementation timetable to the Public Accounts Committee no later than 30 September 2003.

RECOMMENDATION No. 2

That the Canada Customs and Revenue Agency ensure that it begins applying the new format for reporting the losses of tax revenue due to fraud or wilful misrepresentation in the Public Accounts of Canada 2003‑2004.

Furthermore, there is the issue of the lack of information in the Public Accounts of Canada on losses of government revenue due to tax fraud from 1993-94 to 2002-03. The Committee specifically requested and the Agency agreed to provide it with that missing information, using the new format proposed by the CCRA. Thus the Committee makes the following recommendation:

RECOMMENDATION No. 3

That the Canada Customs and Revenue Agency prepare a document providing information in the new format on revenue losses due to tax fraud that occurred between fiscal years 1993-94 and 2002-03. That the Canada Customs and Revenue Agency submit a copy of this document to the Public Accounts Committee no later than 31 March 2004.

The Committee expressed other concerns about whether the Public Accounts of Canada would publish any information about losses of tax revenue arising from erroneous payments or suspected fraud that were not currently subject to any court action. Mrs. Fraser told the Committee that the Public Accounts contains separate schedules about accounts receivable and write-offs that would include such kinds of information. CCRA officials confirmed that aggregate information does indeed appear in the schedules covering both accounts receivable and write-offs. This leads the Committee to make the following recommendation:

RECOMMENDATION No. 4

That the Canada Customs and Revenue Agency prepare a document containing information, segregated by revenue line, on the portions of accounts receivable and write-offs that are attributable to suspected fraud. That the Canada Customs and Revenue Agency begin reporting this information on an annual basis beginning with the fiscal year 2003-04.

Related to the issue of reporting losses of revenue, the Committee enquired about the CCRA’s investigation and enforcement activities, in particular those audit activities designed to identify and prevent tax fraud. In the 1999 study of Revenue Canada’s GST pre-payment audit program, the Auditor General had raised concerns about the levels of compliance and the very low levels of GST audit coverage (less than 1% of credit return files were audited).[5] Mrs. Fraser told the Committee that “one of the concerns that we had was that the number of audit files being selected for audit had been decreasing, and the Agency itself, and I think to their credit, in their performance report, indicate that they are not meeting their targeted levels for audit. I think that actually they should be commended for noting an area where they believe that they have not met their own target and where improvements are necessary. I think the Minister has indicated that new funding is going in there.” The Agency has already undertaken initiatives to improve the levels of compliance with and enforcement of the GST. The Auditor General suggested that the Agency could be required to provide information about these new initiatives to strengthen compliance and increase audit coverage. This prompts the Committee to recommend:

RECOMMENDATION No. 5

That the Canada Customs and Revenue Agency prepare a document containing summary information on the recent initiatives and pilot projects designed to strengthen the compliance and enforcement activities of the Agency. That the Canada Customs and Revenue Agency submit a copy of this document to the Public Accounts Committee no later than 31 March 2004.

CONCLUSION

As a matter of record, the Committee recognizes the difficult challenges that the Canada Customs and Revenue Agency must overcome on a daily basis. The Committee wishes to express its appreciation of the dedication and diligence of all the Agency’s staff in accomplishing their tasks and responsibilities. The fact that the Agency immediately proposed concrete solutions to address the noted gaps in its reporting of tax losses demonstrates how seriously it takes its mandate.

Given that parliamentarians are ultimately dependent upon the federal government to provide them with the information they need in order to enable them to carry out their duties, the Committee wishes to see the Agency make demonstrable progress in resolving the outstanding issues.

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 (Meeting Nos. 8, 13, 20, 32 and 34) is tabled.

 

Respectfully submitted,




JOHN WILLIAMS, M.P.
Chair