Tax Executives Institute, Inc., Income Tax Questions Submitted to Canada Revenue Agency
December 4, 2018
Tax Executives Institute Inc. ("TEI") welcomes the opportunity to present the following questions and comments on income tax issues, which will be discussed with representatives of the Canada Revenue Agency ("CRA") during our liaison meeting on December 4, 2018. Should you have any questions about the agenda in advance of the meeting, please do not hesitate to contact Brian Mustard, TEI's Vice President for Canadian Affairs, at (514) 870-1331, or Carolyn Mulder, Chair of TEI's Canadian Income Tax Committee, at (905) 821-2111, extension 78046.
Technology is front and centre in the current environment. TEI is interested to understand how the CRA is currently using technology to improve its processes, and how the CRA envisions technology impacting income tax audits over the next three to five years. We would also appreciate the CRA's thoughts regarding the involvement of large business taxpayers in its technological development, and the role that TEI can play in helping the CRA achieve its technology development goals.
Service Technology for Large Business Taxpayers
CRA currently provides several types of service technology for Large Business Taxpayers:
* Online mail is an e-mail service whereby the CRA will send individuals, businesses and representatives an e-mail notification when there is mail for the client to view within their secure online portal. This service is available in My Account, My Business Account or Represent a Client and over 33 million pieces of correspondence have been issued to both individuals and businesses in this service;
* Submit documents allows individuals, businesses and representatives to send certain documents to the CRA electronically and securely. Once documents have been submitted, a confirmation number and a reference number are provided for future communications with the CRA. Users can submit documents that have been requested by the CRA that have a related case number or they may submit documents on a voluntary basis by uploading and selecting the reason for their submission on the pick list. This service is available in Represent a Client, the secure portal for tax representatives (and also in My Account, My Business Account);
* Audit Enquiries service both My Account and My Business Account, where auditors and taxpayers can send e-mails and attach documents within the secure portals about ongoing audit cases; and
* My Business Enquiries service within My Business Account is another electronic communications tool where clients can submit their account specific enquiries and receive a response in writing from within the secure portal.
As part of our ongoing efforts to improve our digital services and to meet our clients' needs, the CRA is exploring and analyzing the use of other forms of digital correspondence and continues to monitor industry and government wide direction as well as changing technology in this regard.
Technology in Compliance Programs
The CRA is using technology to improve the consistency of our internal audit practices and sharing of information. This will result in taxpayers seeing more consistency in responses from the CRA. Also, the CRA uses electronic tools to risk assess 100 percent of all large business corporate tax returns on a yearly basis, improving our ability to identify high risk transactions
The CRA uses these tools to analyze taxpayer information to assess the tax non-compliance risks of large businesses. Automation allows the CRA to better focus its compliance resources on high risk cases and specific legal entities of interest, thereby permitting more focused and efficient audits.
The CRA has an ongoing IT project that will enable the electronic submission and storage of numerous election forms, including the T2057, T2058, and T2059, and other commonly used forms. The project will improve and enhance services available to taxpayers, including through MyBA (My Business Account), such as viewing filed elections. Taxpayers will have forms and elections processed more quickly and the CRA will realize efficiency gains through reduced manual labour associated to the processing, validation, and physical storage.
Over the next few years, we will continue to invest in business intelligence and expand the Agency's risk assessment capabilities and better focus its resources on the highest risk cases of non-compliance at the national level.
The CRA is also increasingly using technology to analyze the large amount of data contained in tax filings and third-party information sources to identify potential non-compliance. These sophisticated methods are helping the CRA to identify particular aspects of non-compliance by various groups such as wealthy high net worth individuals, those with significant offshore transactions, multi-national enterprises, etc., thereby permitting more focused and efficient audits.
Follow-up Questions and Carryover Items from Prior Years
Question 1. Update on Investment to Combat Tax Avoidance and Tax Evasion
In the 2016 federal budget, it was announced that $444.4 million would be invested over five years to enhance the CRA's efforts to crack down on tax evasion and combat tax avoidance by hiring additional auditors and specialists, developing robust business intelligence infrastructure, increasing verification activities, and improving the quality of investigative work targeting criminal tax evaders. Then, in the 2017 federal budget, it was announced that an additional $523.9 million would be spent over five years to prevent tax evasion and improve tax compliance. Most recently, in the 2018 federal budget, the government announced that to further combat tax evasion and tax avoidance, it would invest $90.6 million over five years to address additional cases that have been identified through enhanced risk-assessment systems.
The 2016-2017 Departmental Results Report, which was published on the CRA website, provided specific information on international and large business, offshore non-compliance, and the Panama Papers. TEI would appreciate an update from the CRA on these three matters, including lessons learned and an elaboration of your current areas of focus.
As noted in the question, to help combat tax evasion and aggressive tax avoidance, the Government made a combined investment of over $1 billion in the 2016, 2017, and 2018 federal budgets. This investment has allowed the CRA to continue to expand the tools it has to improve compliance.
Electronic Funds Transfers
With our new systems, we are increasingly able to automatically access and review all international electronic funds transfers (EFTs) over $10,000 entering or leaving the country. This represents over 1 million transactions each month. Reviewing these transfers helps us identify transactions on which taxes should potentially have been paid, and better risk-assess individuals and businesses.
Since January 1, 2015, financial institutions have been required to report to the CRA all international EFTs of $10,000 or more. As of March 31, 2018, the CRA had analysed over 187,000 EFTs, involving over $177 billion, related to eight jurisdictions or financial institutions of concern.
The Agency's review of the Panama Papers has already identified over 3,330 offshore entities with 2,670 possible beneficial owners that have some link to Canada. The Agency has reviewed and risk-assessed over 80 percent of these possible beneficial owners. The Agency is currently auditing over 1,100 taxpayers with offshore links, and 10 percent of these relate to the Panama Papers.
As of March 31, 2018, the Agency had 50 cases of offshore tax evasion under investigation. These include several related to the Panama Papers, whereby multiple search warrants have been executed.
Building on the foundation established in addressing the Panama Papers, the Agency has begun to review the more recent Paradise Papers. For both sets of Papers, the CRA will share information with treaty partners and take appropriate actions to ensure compliance with tax laws. These actions include conducting criminal investigations into tax evasion, tax fraud, and other serious violations of tax laws, and, where warranted, referring files to the Public Prosecution Service of Canada (PPSC) for criminal prosecution. Upon conviction, tax evaders face court imposed fines, jail time, and publicity of their conviction, in addition to having to pay the taxes they tried to evade, plus interest and penalties.
Key Results from 2017-2018: International, Large Business, and Offshore Compliance Activities
* We completed almost 5,600 international and large business audits, which includes over 2,700 aggressive tax planning audits and 235 offshore audits.
* Our international and large business audit activities identified almost $8 billion in fiscal impact, (1) including $2.9 billion from our efforts to combat aggressive tax planning. Fiscal impact consists of tax assessed, tax refunds reduced, interest and penalties, and present value of future federal tax assessable arising from compliance actions. It does not account for the impact of appeals reversals and uncollected amounts. $719 million of fiscal impact was refunded during 2017-2018 through the resolution of double taxation issues with Canada's treaty partner countries. This amount has been included in our program results for prior years.
* As part of our budget investments, we have significantly exceeded our target results of $319.5 million and identified $500 million in additional Tax Earned by Audit (TEBA). (2)
* We assessed approximately $21 million in income tax third party penalties.
* We received 196 calls and 93 written submissions through our Offshore Tax Informant Program.
We received approximately 14.9 million reports of electronic funds transfers over $10,000.
Question 2. Auditor...