Public Accounts Committee on June 6th, 2006

[The Chair, Liberal, Shawn Murphy]

I'd like to call the meeting to order, and I want to welcome everyone here.

This, colleagues, is the meeting called pursuant to Standing Order 108 of the standing orders, dealing with Canada Revenue Agency collection of tax debts, chapter 8 of the May 2006 Report of the Auditor General of Canada, which stands referred to this committee.

We're very pleased to welcome this morning the Auditor General, Sheila Fraser; the assistant auditor general, John Rossetti; and principal, Jamie Hood.

From the Canada Revenue Agency, we have William Baker, deputy commissioner and chief operating officer. Mr. Baker, you're here wearing a different hat today. Welcome.

We also have Guy Proulx, the assistant commissioner, taxpayer services and debt management branch; Fred Vivash, director general, tax operations directorate; and Michael Snaauw, director, accounts receivable division--all with the Canada Revenue Agency.

I want to extend to everyone a very warm welcome.

I'll turn the meeting over to you, Ms. Fraser, for an opening statement.

[Sheila Fraser, Auditor General, Office of the Auditor General of Canada]

Thank you, Mr. Chair.

We thank you for this opportunity to present the results of our audit of the collection of tax debts. As you mentioned, I'm accompanied by John Rossetti, assistant auditor general, and Jamie Hood, the principal responsible for this audit.

Once a year we prepare a report for Parliament called the “Status Report”. This report focuses on what the government has done to address recommendations made in a selection of previous performance audits and assists parliamentarians to hold the government to account for its stewardship of public funds. Our audit of the collection of tax debts follows up on previous work done by the office more than a decade ago.

In our 1994 audit we found, among other things, that the department's automatic risk scoring systems developed to help prioritize accounts for collection action were ineffective. We also found that the department lacked adequate information on the results of collections to assess performance properly.

Overall, this year we found that the agency has not made satisfactory progress in addressing our 1994 recommendations. Its approach to assessing files for risk continues to lack the necessary sophistication, and the agency still lacks information it needs to manage the collection of tax debts efficiently and effectively. While these are difficult and complex issues to resolve, we had expected to see greater progress.

What are the key parameters of the tax debt? The agency had more than three million collection accounts totalling about $18 billion at March 31, 2005. This total represents just over 5 per cent of the $332 billion in total taxes paid to the agency in 2004-2005.

The agency needs good risk management systems because its resources are limited and its collectors need to focus their efforts on the riskiest accounts. Since 1994, the agency has made some improvements to its risk-scoring systems, but it still has a long way to go.

Because of the weaknesses we found in risk management, we concluded that the agency has no assurance that the riskiest files are given priority.

With respect to management information, we found several shortcomings. We found that management does not have a good understanding of why the amount of tax debt is growing at a faster rate than total taxes paid, nor does it have a good understanding of the types of accounts that make up the total tax debt. Management lacks this understanding because it is not collecting the appropriate data.

We also found that management lacked important information on performance. For example, the amount of cash collected on automated transactions in accounts processed at the national call centre is not available, although these accounts totalled about $2.5 billion at March 31, 2005.

In addition, management lacks information on how well the various types of collection actions are working. Management needs this information to ensure that its strategies are working and its resources are assigned to the right areas.

As is often the case in our audits, Mr. Chair, there are positive findings to report. For example, the agency has updated its automated system, has opened a national call centre, and has established national pools to better manage workload.

Finally, let me turn to the agency's strategic vision for collection of tax debts. The vision sets out ambitious goals to be achieved by 2010 that incorporate many good practices used in other jurisdictions and in the private sector. The vision also identifies the major challenges faced by the agency in collecting tax debts, including those raised again in our report.

However, at the time of our audit, we found no detailed plan outlining how the agency will address the specific challenges described in the vision, or the measures that will be used to gauge progress towards its goals. Without such a plan, the agency may have a hard time reaching its goals.

We are pleased that the agency has agreed with our recommendations and that its vision addresses the need for good risk assessment and improved management information.

The key question is: when will we see the desired results? Your committee may wish to ask the agency to provide you with a detailed action plan and a timetable for completing its vision, and to provide the committee with regular progress reports.

Mr. Chairman, that concludes my opening statements and we would be pleased to answer your committee's questions. Thank you.

[The Chair, Liberal, Shawn Murphy]

Thank you very much, Ms. Fraser.

We're going to now call upon Mr. Baker for an opening statement.

[William Baker, Deputy Commissioner and Chief Operating Officer, Canada Revenue Agency]

Thank you, Mr. Chair. My colleagues have already been introduced to members of the committee, and we're certainly pleased to be here today to discuss this chapter.

I'd like to say that the agency finds the observations made by the Auditor General to be pertinent and highly consistent with our own understanding of where improvements are needed to our program. We have agreed with all of the Auditor General's recommendations and have initiated activities to address each of them.

I did want to add some important context around the CRA's tax collection program, which is indeed large and complex, and recognized as such. I'd like to speak a little bit about accounts receivable and what they represent.

First of all, I think it's important for committee members to understand that fortunately the vast majority of Canadians pay their tax obligations when due. However, as in all public and private enterprises, certain accounts do become overdue and require the attention of our collectors. As of March 31, 2005, a little over a year ago, overdue accounts amounted to about $18 billion, as reflected in the Auditor General's report. This represents 5.4% of the $332 billion a year that the Canada Revenue Agency collects.

Accounts receivable represent taxes and duties owing at a given point in time. This is an inventory that undergoes considerable turnover as new accounts arrive and existing accounts are resolved.

Our field collectors collected some 440,000 accounts valued at $8.8 billion in 2004-2005. This is a marked improvement over prior years given that we were able to prevent further growth in our inventories.

Accounts receivable do not represent lost revenues. Instead they represent money owed to the government by taxpayers, the majority of whom will eventually pay the outstanding balance and associated interest. The $18 billion owed at the end of 2004-2005 included a significant number of new accounts, many of which have since been collected during the course of the 2005-2006 fiscal year.

We are pleased that the Auditor General noted certain areas of improvement that the agency has made since 1994 and also recognized some productivity gains associated with our collection efforts.

Cash collections from our workforce rose from $5.3 billion in 1996-97 to $8.8 billion in 2004-05. This means that each collector is now collecting $2.3 million of revenue per year, compared to $1.8 million in 1996-97. We've exceeded our Treasury Board cash commitments tied to the past influx of additional resources. Furthermore, from 1996 to 2005 the agency resolved some $80 billion in debt, which represents a significant portion of overall tax debts that came into the tax collection program inventory over that period of time.

Tax debts, unlike private sector debts, do not originate with clients we have voluntarily picked or chosen to extend credit to. This is noted in the Auditor General's report. This is an important difference, obviously, as it significantly affects our ability to limit risks, and this adds challenges to our capacity to manage and restrict growth in our portfolio of receivables.

The Auditor General's report mentions that while the agency has made improvements to the collection of tax debts since its last 1994 report, that tax debt continues to grow at a faster rate than total taxes paid. This is correct, although we were able to contain the growth in accounts receivable in 2004-05, and our results for 2005-06 are encouraging. We are dealing with complex legislation and complex systems.

Systems improvement and business transformation are continuous processes requiring a long-term vision and a high level of commitment. The challenge for the agency, as described by the Auditor General, is to turn our vision of an integrated revenue collection system and a more modern approach into reality through detailed planning, focused management attention, and measurement of results. I think we all agree on what needs to be done, and we believe we're well positioned to take on these challenges.

Those are the only opening remarks I wish to make, Mr. Chair, and I am pleased to take any questions.

[The Chair, Liberal, Shawn Murphy]

Thank you very much, Mr. Baker, and thank you to your officials for being here.

We're going to go now to the first round.

Madam Ratansi, you have eight minutes.

[Yasmin Ratansi, Liberal, Don Valley East, ON]

Thank you, Mr. Chair, and thank you to the team.

I would like to reiterate that the Auditor General is really held in very high esteem by Canadians. Whatever the Auditor General says, Canadians listen and regard it as the truth. So I'd like to draw your attention to a statement that was made in the House, to see whether you said, or can recall saying, these things.

In response to a question asked by the member from Yorkton—Melville, the respondent says:

Now the Auditor General has confirmed what the member for Yorkton—Melville has said and what we have said, that while he was raising these concerns, the federal Liberals in high places were conspiring to hide those overruns from Canadians and in contempt of Parliament.

I'd like to know if you ever made a statement to that effect.

[The Chair, Liberal, Shawn Murphy]

You're out of order, Ms. Ratansi.

Is this about debt collection in the Canadian Revenue Agency?

[Yasmin Ratansi, Liberal, Don Valley East, ON]

I'd like to come to that. But I'd like to make sure the Auditor General's—

[The Chair, Liberal, Shawn Murphy]

No, we'd like to come to it now.

[Yasmin Ratansi, Liberal, Don Valley East, ON]

Mr. Chair, the Auditor General has a very high reputation, and we cannot keep on—

[The Chair, Liberal, Shawn Murphy]

We know that. But—

[Yasmin Ratansi, Liberal, Don Valley East, ON]

—assigning things to her that she hasn't said, which will really be detrimental to her reputation. As an auditor, I'm quite concerned about that.

[The Chair, Liberal, Shawn Murphy]

Ms. Ratansi, this meeting is about the Canada Revenue Agency's collection of tax debt, so we've going to ask that the—

[Yasmin Ratansi, Liberal, Don Valley East, ON]

Fair enough. I just wanted to ensure that the auditor was aware of these things.

I have a question then to the Canada Revenue Agency.

The auditor states that after the 1994 audit, CRA had taken a number of steps to modernize the collections operation. I know you're new to this, Mr. Baker; you've just taken over. What are the systems that have been in place, and what are some of the challenges of the system? If you could answer that, then I can go forward with the next round.

[William Baker]

I'll start, and then with permission, Mr. Chair, I'll pass this to my colleague Mr. Proulx.

There have been long-standing systems in place to support the agency's work in collections. I think we recognize, though, that we have to do some development of more sophisticated systems that allow us to do proper risk management and selection of files. This is the nature of revenue business, risk management, and then targeting our resources at the areas of the greatest return for the Canadian public.

With that context, perhaps I'll ask my colleague Guy Proulx to respond.

[Guy Proulx, Assistant Commissioner, Taxpayer Services and Debt Management Branch, Canada Revenue Agency]

Following the 1994 audit.... Just to set the record, back in those days, just after the merger with customs and also with the GST, we had some challenges with stand-alone systems. Our focus initially, back in 1994, was to integrate the GST and these other business lines that were merged into our department on our base of legacy systems.

Also at that point in time, recognizing that our risk profiling approaches were deficient—this was in follow-up to the OAG recommendations—we invested significantly in building updated risk profiling systems. We actually built what I think is the only outbound government call centre in Canada to call people who owe money, whether in GST, T1 debts, or individual debts—all kinds of things like that. As well, some of these old legacy systems don't last forever; they need to be modernized. So at the same time, we invested significantly in the maintenance and update of these older systems.

I'm going to talk more to the challenges. Sometimes it's better to take two steps back than two steps forward on some of those challenges, because the investment in systems, especially in old legacy systems that have a lot of shortcomings.... Sometimes new technology is much better than investing in older technology and rebuilding old systems. That's the point we're at right now in terms of reinvesting and modernizing the basic systems we use to manage our collections workloads.

[Yasmin Ratansi, Liberal, Don Valley East, ON]

What concerned me a little was that the auditor stated in her opinion, when she was giving you the recommendation, that performance could be enhanced and the cost of collection possibly reduced if results-oriented information could be developed and performance measures and debtor profiling be put in. In response, the CRA was not very embracing of those recommendations.

Could you clarify why you were not embracing of the recommendations? You just “supported” them. What did you mean by “support?”

[Guy Proulx]

My understanding is that we have agreed with all of the Auditor General's recommendations. Basically we are putting in place various actions to address all of the recommendations. So I'm not sure that I agree with your statement that we are not supportive of the recommendations.

[Yasmin Ratansi, Liberal, Don Valley East, ON]

That's what our research shows us. So the bottom line is, what sort of debtor profiling are you doing? Are you doing any debtor profiling?

[Guy Proulx]

The debtor profiling issue is a complex issue when you look at the various types of debts that we manage: individuals, business, self-employed, corporate taxes, GST, and the list goes on. What we are looking to do is to accumulate all this information into one system where we will be able to risk-profile all of the issues around that tax base, and then we will be able to address all of those issues through a more strategic use of the information that currently resides in this agency but is not being well captured. With the data and the information, there's a gap there. So we have invested heavily into more modern risk profiling techniques, such as data warehouses and data mining. We are developing the risk profiling, and we have hopes that in the near future we will be able to roll out this new technology as we migrate business line by business line on the new platform.

[Yasmin Ratansi, Liberal, Don Valley East, ON]

As you're migrating to these platforms, how are you accommodating the changes that are taking place in the reduction of the GST, but also in the increase in the income tax and different tax credits? Do you find that those systems will pose challenges as these things are going to be implemented? Or will it be smooth sailing?

[Guy Proulx]

There are different types of systems in an agency our size. We have accounting systems that manage the accounting for all of our revenue lines, and if there's a balance outstanding, that's passed on to a collection system. So whether you upgrade the rate or reduce the rate, in the end if the taxpayers pay on filing, we never see those accounts in revenue collections. So it's only if there's a balance outstanding, and I think your question is more about how we accommodate rate fluctuations.

Every year the government comes up with a budget, and there are many different issues that affect the actual taxation of individuals: tax credits, raises or reductions in personal income tax, and things of that nature. So I think the agency has a very good track record of being able to adapt on a yearly basis to those fluctuations. If there are any balances outstanding at the time of filing, those are passed on to our collection systems. I think that's the area that the OAG is basically suggesting needs a lot of attention.

[Yasmin Ratansi, Liberal, Don Valley East, ON]

So in the $18 billion that you have as outstanding debt, what is the aging of that debt?

[Guy Proulx]

I think that's in the actual Auditor General's report. It's depicted in one of the charts.

[Yasmin Ratansi, Liberal, Don Valley East, ON]

Is it two to three years? Is it two years or three years?