GOVERNMENT RESPONSE TO THE SEVENTEENTH REPORT OF THE STANDING COMMITTEE OF THE PUBLIC ACCOUNTS

 

 

 

 

 

PUBLIC ACCOUNTS OF CANADA 2001-2002,

VOLUME II, PART II, SECTION 3

(LOSSES OF PUBLIC MONEY AND PROPERTY)

 

 

November 2003

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The Government Response to the Seventeenth Report of the Standing Committee on Public Accounts – Public Accounts of Canada 2001-2002, Volume II, Part II, Section 3 (Losses of Public Money and Property).

 

 

 

Recommendation One

 

The Standing Committee on Public Accounts recommended:

 

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.

 

RESPONSE

 

The Canada Customs and Revenue Agency (CCRA) will take immediate action to fully implement its proposed reporting regime in the Public Accounts 2002‑2003.  As such, an action plan to introduce reporting on fraud and wilful misrepresentation in the Public Accounts 2003-2004 is not required.  Information will be provided on cases before the courts at the end of that fiscal year as well as actual amounts of losses as confirmed through court convictions, and related recoveries, by revenue line.  Comparable information on convictions and recoveries will also be provided for fiscal year 2001-2002.

 

Both the Auditor General of Canada and the Treasury Board Secretariat have indicated that they believe that this approach complies with the Treasury Board Policy on Losses of Money and Offences and Other Illegal Acts Against the Crown.

 

 

Recommendation Two

 

The Standing Committee on Public Accounts recommended:

 

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.

 

 

 

RESPONSE

 

The CCRA will fully implement the new format for reporting losses of revenue due to fraud or wilful misrepresentation in the Public Accounts of Canada 2002‑2003.

 

 

Recommendation Three

 

The Standing Committee on Public Accounts recommended:

 

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.

 

RESPONSE

 

The CCRA’s systems apply payments against outstanding balances; they do not provide information on payments against particular transactions.  The CCRA has nevertheless responded to this recommendation to the extent feasible using manual estimates.  Information for fiscal years 2001-2002 and 2002-2003 will be included in the Public Accounts of Canada 2002-2003 as discussed above.  The CCRA has also provided below the aggregate amounts of the original losses from income tax and GST fraud convictions for the 1993 to 2000 period.  However, due to a lack of detailed historical records (the record retention period has expired for many of these records) on fraud losses and recoveries and the fact that balances related to these assessments are not tracked separately in client accounts, the CCRA cannot replicate the Public Accounts tables for prior years.  To attempt to do so would require an extensive manual review of hard copy files for relevant documents and information, disaggregation of data by revenue sources (for example, income tax, GST, excise), and the application of arbitrary rules to partial payments and new assumptions regarding the portions of recoveries that apply to frauds.  An accurate reconstruction along these lines is impossible.

 

 

 

Prosecutions by Canada Customs and Revenue Agency

 

Income Tax

 

	Number Prosecuted	Number Acquitted	Number Convicted	Tax Convicted*	Fines
1993-94	147	13	134	$46,814,050	$15,210,384
1994-95	137	6	131	$23,088,504	$12,714,176
1995-96	154	10	144	$13,164,571	$  9,648,452
1996-97	195	17	178	$49,981,310	$18,117,591
1997-98	210	11	199	$12,576,383	$  7,184,818
1998-99	183	17	166	$10,367,182	$  8,334,243
1999-00	169	16	153	$70,610,589	$  8,814,675
2000-01	180	10	170	$13,108,833	$15,882,538

 

*amount of tax on which conviction is based

 

 

Prosecutions by Canada Customs and Revenue Agency

and Ministère du Revenu du Québec

 

Goods and Services Tax

 

	Number Prosecuted	Number Acquitted	Number Convicted	Tax Convicted*	Fines
1993-94	15	N/A	15	N/A	$1,615,620
1994-95	32	N/A	32	$  1,354,111	$1,168,506
1995-96	27	0	27	$  4,584,137	$1,321,994
1996-97	46	1	45	$     802,284	$   925,367
1997-98	72	3	69	$10,387,129	$2,126,599
1998-99	66	6	60	$  2,983,615	$2,015,720
1999-00	61	5	56	$  3,153,884	$2,532,703
2000-01	113	2	111	$  9,225,552	$5,590,982

 

*amount of tax on which conviction is based

 

Notes:

 

-          Tax Convicted figures may include taxes attempted to be evaded as well as taxes actually evaded.

-          Two or more persons may be convicted of evading or attempting to evade the same taxes.

-          Data are not available to correct these situations but the number of instances is small.

-          N/A indicates data are not available.

 

Information on Customs frauds during the above period cannot be reconstructed as the records are highly dispersed, manual, and incomplete.

 

 

Recommendation Four

 

The Standing Committee on Public Accounts recommended:

 

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.

 

RESPONSE

 

The CCRA’s Public Accounts reporting provides this information in aggregate; the CCRA’s accounting systems do not track payments by type of transaction but are designed to track balances owing.  These systems do not separately disclose amounts of suspected fraud and related transactions / recoveries. 

 

To do so would be administratively complex, requiring the use of subjective allocation rules.  For example, subjective judgements would be needed to separate reassessments where CCRA disagrees with the taxpayers’ efforts at tax planning or interpretations (with no criminal intent) from reassessments due to potential fraud.  A manual review of taxpayer files with respect to all reassessments resulting in accounts receivable would be required.  The CCRA would have a low confidence level in the numbers supplied.

 

 

Recommendation Five

 

The Standing Committee on Public Accounts recommended:

 

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.

 

 

RESPONSE

 

Goods and Services Tax / Harmonized Sales Tax (GST/HST) Enhanced Registration Review (GERR)

 

The GST/HST Enhanced Registration Review (GERR) project has been in operation in the St. John's Tax Centre (TC) since December 2000.  The focus of GERR is to confirm client identification information shortly after initial registration.  During the confirmation process, TC staff validate client data to ensure the integrity of the information being stored in the Business Number (BN) system.  As a result of this validation, referrals of suspicious registrations are made to the BN Services area of the TC, the Tax Services Office (TSO) Audit Screening area and the TSO T1 Non‑filer/non‑registrant area for further review.

 

Once the Audit screener further reviews the GERR referral, a determination is made as to which area of Audit should action the file:

·        Underground Economy

·        Pre-Payment Section

·        Workload Development

·        Investigations

 

The GERR pilot project in the St. John's TC has proven to be very successful in allowing us to categorize registrants according to risk and to assign the appropriate attention that should be paid to them.  In six months (April 2002 to September 2002), 5,916 registrants were referred to Audit with the following results:

 

·        321 (5.4%) audits undertaken;

·        45 (0.76%) audits set up but later cancelled;

·        26 (0.44%) multi-cells identified;*

·        612 (10.3%) high risk registrants;

·        1,426 (24.1%) medium risk registrants;

·        2,301 (38.89%) low risk registrants; and

·        1,185 (20.03%) no risk registrants

 

Note:  *The term ‘multi-cell’ refers to many, small fraudulent registrants that have been created by a perpetrator to elude auditors.  No legitimate business exists.

 

As a result of the successful GERR pilot, a decision has been made to implement the program on a national basis.  In June 2003, the workload in St. John's was expanded to include all new GST/HST registrations done in Ontario, New Brunswick, Newfoundland and Labrador, Nova Scotia, and Prince Edward Island.  In September 2003, the Winnipeg TC commenced reviewing new GST/HST registrations occurring in the Yukon, Northwest Territories, Nunavut, Saskatchewan, Alberta, Manitoba and British Columbia.  All GST registrations done in the Province of Quebec will continue to be the responsibility of the Ministère du Revenu du Québec. 

 

 

 

 

Other Registration Enhancements

 

A number of administrative changes are being made to the registration program to reduce the potential for high-risk registrants.  These include:

 

·        make it mandatory to provide a Social Insurance Number (SIN) at time of registration for GST;

·        strengthen the reference guide and verification information available to field staff doing registrations;

·        require photo identification for clients registering in person;

·        centralize non-resident registrations; and

·        data base search to increase BN data base integrity by adding SIN for those sole proprietors from whom the SIN was not obtained at original registration.

 

GST/HST Audit Program Enhancements

 

TSOs throughout the country maintain separate GST/HST prepayment audit program teams.  These teams are staffed with experienced, knowledgeable people with strong analytical skills, whose task it is to review and analyze GST/HST credit returns and rebate applications for potential revenue loss to the CCRA.  Furthermore, funding for the prepayment program is segregated and considered to be non-discretionary.  In 2003-04, 163 FTEs are being re‑allocated to the prepayment program from other compliance programs.

 

The credit and rebate returns that the prepayment staff review are referred from the GST returns processing system based on automated validity checks that have been built into the system.  These automated validity checks have been enhanced to make them more discriminating and better able to target high-risk claims.  The first changes were put in place in April 2002, and the remainder will be incorporated into the system in the fall of 2003.  Several of the changes specifically address concerns about the legitimacy of the business.  As well, a project is underway to analyze in detail the effectiveness of the existing edits.

 

High Risk Analysis Teams (HRAT) have now been set up in all regions but Quebec (where the Ministère du Revenu du Québec is responsible for administering the GST).  Begun as a pilot in the Southern Ontario Region, the HRAT program was implemented on a national basis in March 2001.  The teams use internal and external databases to proactively search for high-risk registrants such as multi-cell bodies and potentially fraudulent schemes, and, once these have been identified, take steps to prevent further leakage such as placing refund holds on the accounts, referring cases to audit to be assessed, and the closing of accounts.  In addition, the HRAT teams work closely with Investigations and Collections to ensure that registrants who have made fraudulent claims are prosecuted, and, where possible, recoveries made.

 

Risk Assessment

 

As of January 2002, the GST/HST registrant database was added to the Compliance Profiling, Measurement and Assessment (COMPASS) System.  This gives those responsible for audit file selection a powerful analytical tool for risk assessment, and a much-improved capability to initiate audits as soon as registrants are identified as high-risk.  A GST experts forum was held in February 2002 to better model GST non-compliance and another symposium is planned for 2003 to focus on improvements to CCRA risk assessment processes.