Public Accounts Committee on Dec. 10th, 2018

[The Chair, Conservative, Kevin Sorenson]

I call the meeting to order.

Good afternoon, colleagues. This is meeting number 123 of the Standing Committee on Public Accounts for Monday, December 10, 2018.

Today we are in public and we are being televised. I would encourage those of you in the audience and around the table today who have a cellphone or any kind of communication device to please mute it or put it on vibrate.

We're here today in consideration of “Report 7—Compliance Activities—Canada Revenue Agency”, from the 2018 fall reports of the Auditor General of Canada. We're honoured to have with us again today, from the Office of the Auditor General, Mr. Jerome Berthelette, assistant auditor general of Canada, and Mr. Martin Dompierre, principal.

From the Canada Revenue Agency, we have Mr. Bob Hamilton, commissioner of revenue and chief executive officer, and Ted Gallivan, assistant commissioner, international, large business and investigations branch.

We welcome you here.

We will turn to Mr. Berthelette at this time for opening statements, and then we'll go into questions.

Thank you.

[Jerome Berthelette, Assistant Auditor General, Office of the Auditor General]

Mr. Chair, thank you for this opportunity to discuss our fall 2018 report on compliance activities of the Canada Revenue Agency. Joining me at the table is Martin Dompierre, who was the principal responsible for the audit.

Part of the agency's mandate is to ensure that taxpayers comply with the income reporting requirements of the Income Tax Act. The agency aims to protect the integrity of the tax system by identifying and deterring those who do not comply.

We found that the Canada Revenue Agency inconsistently applied tax rules when it audited or reviewed taxpayers' files, even though the Taxpayer Bill of RIghts requires the agency to apply the rules in the same way to taxpayers in similar situations.

There were a number of reasons for these inconsistencies. In some cases, the judgment of agency staff conducting compliance activities resulted in inconsistent treatment of taxpayers in the same situation.

For example, if the agency caused delays in conducting compliance activities, it had the discretion to charge interest and penalties to the taxpayer or to waive them. We found that some of the agency's auditors waived interest and penalties for the time it took them to get information from the taxpayer's banks; other auditors charged interest and penalties because they considered that time to be the taxpayer's fault for not providing the information. These discretionary decisions resulted in inconsistent treatment of taxpayers in the same situation.

According to the agency's own internal audit, the agency waived penalties and interest differently, depending on where the file was processed. Moreover, staff from different program areas considered different criteria for similar situations when granting requests for taxpayer relief.

We also found that the agency waived $17 million in interest and penalties despite the fact that the taxpayers were identified as at risk for non-compliance and were undergoing an audit at the time they asked for relief.

We found regional inconsistencies in file reassessments. Taxpayers in one region waited an average of seven months longer than those in another region for the agency to complete an audit. In one region, the agency took over 40 weeks to process a taxpayer's request for an adjustment, whereas in another region it took 12 weeks.

We also found differences in how the Canada Revenue Agency treated taxpayers, depending on how the agency classified them. The agency had different compliance programs for individuals, small or large businesses and taxpayers with offshore investments. Because each program had different compliance procedures, not all taxpayers were treated consistently. For example, the time the agency gave a taxpayer to comply with a request for information and whether or not the agency offered the taxpayer some relief from penalties and interest depended on the type of taxpayer.

Each year, the Canada Revenue Agency sets targets for additional revenues from compliance activities. For the five-year period we examined, we found that the targets increased each year and were almost always met or exceeded. This may mean that the targets were set too low. At some point, targets should be harder to achieve and should start to decrease if the agency's compliance activities effectively promote taxpayer compliance. Yet the agency could not explain why its targets continued to rise and were always met or exceeded.

Finally, we found that the additional revenue the agency reported as a result of its compliance activities did not reflect the taxes actually collected. This discrepancy occurred because in its calculation of additional revenue, the agency measured results only partway through the revenue cycle. Therefore, results from additional revenues did not take into account the taxpayers who filed objections with the agency or who appealed through the court system.

In most cases, these taxpayers were successful and therefore did not pay the taxes in dispute. In other cases, the agency was unable to collect taxes because the taxpayer was unwilling or unable to pay, and the agency wrote off the taxes owing. Without accounting for objections, appeals and writeoffs, the agency's calculation of additional revenue was incomplete.

We are pleased to report that Canada Revenue Agency has agreed with all our recommendations and that it has prepared a detailed action plan.

Mr. Chair, this concludes my opening remarks. We would be pleased to answer any questions the committee may have.

Thank you.

[The Chair, Conservative, Kevin Sorenson]

Thank you very much, Mr. Berthelette.

We will now turn to Mr. Hamilton, please.

[Bob Hamilton, Commissioner of Revenue and Chief Executive Officer, Canada Revenue Agency]

Thank you, Chair, for the opportunity to appear today in front of the committee in my capacity as the commissioner of revenue and the chief executive officer of the Canada Revenue Agency.

I am accompanied by Ted Gallivan, assistant commissioner of the International, Large Business and Investigations Branch.

I am here to speak to you about the Auditor General's fall 2018 report that considered the compliance activities of the CRA.

Before discussing our action plan in response to the Auditor General's recommendations, I'd like to provide some very brief context around the increasingly complex environment in which we are operating at the CRA.

The scope of our compliance activities from one case to another varies greatly, from audits of large multinational corporations to reviewing or validating an individual Canadian's T1 tax return. In each case, we structure our activities to promote awareness of, and ensure compliance with, the laws we administer, so as to uphold the public's trust and confidence in Canada's tax system.

The level of effort required to complete a compliance activity depends on the case and its level of complexity. Our workloads vary from region to region in terms of their complexity and the sectors they represent. We need to recognize this variation as we look to implement the changes to improve our compliance efforts.

Audits of sophisticated high-net-worth taxpayers, for example, can require that the CRA resort to court action to obtain the necessary records and information from taxpayers and their representatives. Given the complexity and potential legal challenges, these audits can take much longer to complete, which gives the CRA time to collect the evidence needed to ensure sophisticated taxpayers pay their fair share.

This environment becomes even more complex when tax schemes cross borders. In fact, a significant compliance challenge for tax authorities around the world has been addressing the effects of base erosion and profit sharing.

This is why we are working closely with other countries on better exchange of information and through partnerships such as the joint international task force on shared intelligence and collaboration.

In relation to the detailed management of our audits, reviews like the OAG's provide important information for the agency on areas that require more of our attention to better serve Canadians.

Mr. Chair, the Auditor General's report number 7 examined how consistently the CRA applied its compliance activities for various types of taxpayers across Canada, as well as how the performance indicators for compliance activities were measured, monitored and reported to Parliament.

The Auditor General made recommendations in the areas of consistent treatment of taxpayers, timely processing of reassessments, and performance measures for compliance activities. The agency agrees with these recommendations and is undertaking concrete actions to implement them, while recognizing the differences in our compliance issues and challenges across the various taxpayers with whom we interact.

The CRA's action plan, a copy of which was provided to the committee, identifies how the agency will implement the Auditor General's recent recommendations. The action plan also outlines our approach to review the CRA's internal processes and procedures.

The CRA has committed to acting in all areas identified by the Auditor General within 18 months, and at no additional cost to the government.

For example, the CRA is taking steps to provide information to Canadians about timelines associated with audit activities, as well as developing guidelines for seeking court orders to compel sophisticated taxpayers' co-operation, developing clear guidelines for the administration of taxpayer relief provisions, and establishing guidelines to determine delays attributable to the agency, as opposed to those attributable to the taxpayer. These are a few examples of what we are proposing to do.

Since I became commissioner a little over two years ago, I believe that the agency has demonstrated that we follow through on our commitments following the Auditor General's reports. The agency is realigning its operations and approaches consistent with the recommendation in the Auditor General's fall 2016 and fall 2017 reports.

For example, based on the Auditor General's fall 2016 report on income tax objections, the CRA took steps to improve the timely processing of objections. As a result of these actions, the CRA has reduced its inventory of regular objections by 25% since September 2016.

Also, the Auditor General's fall 2017 report provided recommendations to improve the service to Canadians offered by CRA's call centres. Since then, the CRA has focused its improvements on modernizing technology, increasing agent training and updating service standards.

These updates led to Canadians having improved access to call centres for the 2017 T1 filing season. Seventy-four per cent of calls were answered, 45% by an agent and 29% by automated service, compared to 37% for the 2015 tax filing season.

We are making progress in these areas and we will continue to focus on improvements. The same attention will be paid to the recommendations made in report 7. We will take similar concrete steps to address these most recent recommendations.

As I mentioned earlier, the CRA recognizes the value of audit in providing information and insights that are enabling us to improve our service to Canadians. To this end, we have taken steps to improve our practices through our own internal audits, which the Auditor General just referred to, by implementing comprehensive and systematic self-assessments to identify strengths and areas for improvement within the agency.

Also, promoting a service culture across all areas of the agency to better serve Canadians is a high priority for me personally and throughout the organization. Service includes our compliance activities, where we are putting an increasing emphasis on education and fostering long-term compliance, in addition to our enforcement actions.

I know there's still more work to do in regard to the CRA's compliance activities. The CRA has been actively pursuing and investing in improvements in recent years, including a focus on improved data, analytic tools and a risk-based approach. For example, as the Auditor General noted, the CRA took steps to expand its business intelligence as a means to detect taxpayers who posed a higher risk of non-compliance.

We will continue to explore ways to provide our 6,300 auditors with additional tools and resources to assist them in their important work. What this means is that increasingly the CRA is able to identify taxpayers involved in tax evasion and aggressive tax avoidance, both domestically and internationally, and to ensure that those who choose not to comply with the law face the appropriate consequences.

These efforts, at the end of the day, will help ensure that Canadians have trust and confidence in the fairness and integrity of our administration of Canada's tax and benefit system.

Thank you, Mr. Chair. I welcome any questions the committee may have.

[The Chair, Conservative, Kevin Sorenson]

Thank you very much, Mr. Hamilton.

We'll move to the first round of questioning. It's a seven-minute round.

Go ahead, Madam Mendès, please.

[Alexandra Mendes, Liberal, Brossard—Saint-Lambert, QC]

Thank you very much, Mr. Chair.

Thank you to all of you for being with us today to discuss the Auditor General's report.

Mr. Hamilton, I would like to start with you. I would like to speak specifically to this perception that the CRA is targeting taxpayers and ordinary citizens much more than companies or those trying to evade taxes.

We know that the Government of Canada has made considerable investments to improve these types of investigations and audits in order to find those who are trying to avoid paying taxes.

I would like to see with you and possibly Mr. Dompierre what progress has been made in these efforts to go after people or businesses trying to evade the Canadian tax system, to counter the idea that the CRA focuses only on individual taxpayers, that is, citizens.

[Bob Hamilton]

Thank you for the question.

I will start to answer, then I might ask Mr. Gallivan to add a few points.

The perception that large companies are able to avoid paying taxes, unlike individuals or small companies, is certainly a very important issue for us in two respects.

First, it is very important to ensure that Canadians have confidence in the system and that everyone knows that everyone is paying the right amount of tax. This is very important to ensure the integrity of our system. In this context, we are doing two things. First of all, we have partnerships in other countries around the world, and we put a lot of effort into international and global companies. Also, we have many more auditors and analytical tools. This allows us to achieve a better perception. We can do a better risk analysis and, as a result, better focus our efforts on high-risk cases.

Second, it is important to have good conversations with small companies and individuals. It's important to raise this awareness to ensure long-term compliance with the act. It is always possible that we may have to take action and strengthen afterwards, but we start with a conversation. We try to mention what information we need, why we need it and explain a little bit about the tax system.

Perhaps Mr. Gallivan would like to add something.

[The Chair, Conservative, Kevin Sorenson]

Go ahead, Mr. Gallivan.

[Ted Gallivan, Assistant Commissioner, International, Large Business and Investigations Branch, Canada Revenue Agency]

Thank you, Mr. Chair.

I would like to highlight three points. The first is about coverage; the second is about the results; the third is about what the OAG found.

In terms of coverage, I can confirm that for the 1,200 multinationals operating in Canada, we have 100% risk coverage each year. We conduct a thorough review of these multinationals, and all high-risk ones are audited annually.

The second point I want to mention concerns the results. In exhibit 7.2 of the report, the OAG confirms that the agency's audit results increased by 60% during the audit period. In the last fiscal year, there was $4.6 billion more than in the first. We have sought most of these gains from GST fraudsters, the underground economy, multinationals and those engaged in abusive tax planning overseas.

The third point I would like to make is that the OAG noted a difference in the time required to conduct the audits. Complex audits take longer, but the Income Tax Act itself recognizes that these files are more complicated and, as a result, allows the agency to take up to three years to finalize audits for average Canadians. In addition, the act allows the agency to take three more years—twice the time—if it involves transfer pricing, tax on income earned overseas or these famous overseas trusts. In these cases, the act itself gives three more years to finalize the audits because it recognizes that these files are much more complex.

[Alexandra Mendes, Liberal, Brossard—Saint-Lambert, QC]

Mr. Dompierre, would you like to add anything?

[Martin Dompierre, Principal, Office of the Auditor General]

I don't have any comments on that. Mr. Gallivan described the process used by the agency clearly, including the time required to complete the audits.

[Alexandra Mendes, Liberal, Brossard—Saint-Lambert, QC]

Could we make a distinction here between an audit and a review? I think this also is something that's not quite clear in the minds of most people who read about taxes.

Does it cause the impact that everyday citizens are penalized because they are given much less time to produce documents or to produce proof of something than a company or a small enterprise is given? Is that something that causes that issue?

[Bob Hamilton]

From my perspective, I can certainly say that it's a contributing factor. Oftentimes people use the two terms interchangeably—“review” versus “audit”—but in our world, there's a process of verification and review .

A taxpayer sends information to us, and we check that information. It could be against a third party source or against another piece of information that we have. That can be a relatively straightforward exercise as compared with an audit, which is much more in depth and probes into particular books and records to make sure we understand totally what's going on.

They are two different things, then. One, understandably, would take a longer time than another. It can contribute to a perception of how much of a review or how much of a burden a small enterprise or an individual has.

At the same time, I don't want to diminish the fact that it is something we are thinking about—i.e., whether we have the right risk process in terms of where we focus our activities. There is something to be said, certainly, at the small individual end of things, about whether we could move toward the world where we put a little bit more emphasis on education—we have a liaison officer initiative—and try to get compliance right from the start instead of a process whereby something gets submitted and then we have a conversation afterwards.

It is an area that I think we're sensitive to in terms of substance and impacts on taxpayers but also with respect to perception, as you mentioned. This issue of review versus audit is probably something we need to better explain to people. Again, what are we doing, why are we doing it, and how do these things differ?

[The Chair, Conservative, Kevin Sorenson]

Thank you, Mr. Hamilton, and thank you, Ms. Mendès. We're a minute over.

Mr. Kelly is next, please.

[Pat Kelly, Calgary Rocky Ridge, CPC]

Thank you.

Thank you to the Auditor General for this report and to the commissioner and deputy commissioner for appearing here to answer our questions. Indeed, thank you to all of you for your service to Canadians.

There are a lot of troubling elements in this report. There are many things that I think many Canadians would be quite rightly concerned about. I want to focus first on one that I think many Canadian taxpayers would find very troubling. This is the discrepancy in time allowed for compliance for the production of documents. It's the discrepancy between what's categorized in the report as individual Canadians, people who are filing a T1 general on behalf of themselves, versus other categories of tax filers.

I think I'll go straight to you, Mr. Hamilton. I'd like you to explain why an individual Canadian gets 90 days to produce a document, and if they fail to produce it, immediately has their benefit or credit, as the case may be, struck, yet other categories of tax filers—including, it would appear, any with offshore transactions—are given additional time.

This report states “Sometimes, the Agency did not obtain information at all, and the file was closed without any taxes assessed.” Please explain.

[Bob Hamilton]

I would say that as I read this report, I read other items that say there may be inconsistencies across the agency in what we do and how we're treating different taxpayers. It's something that we need to pay attention to, and we need to learn whatever lessons we can from the observations.

I would just say in this area that if we have a deadline of 90 days, for example, to get records, which may be reasonable in most cases, and a taxpayer finds that is unreasonable, we also have the flexibility, if they call us, to come up with an alternative arrangement. We can show some flexibility when we know about it. That's on the smaller end, if you like, for the individuals.

On the other side, I think it's just a fact of life for us that some of the complex structures and transactions that we run into in the international or multinational space are just going to take more time to go through in order to get the information we need. It's a challenge that Ted's auditors face all the time.

We like to think that we've built some flexibility into the system to be able to accommodate when more time is required so that we can get to the right result, but it is something that we're taking a look at, based on this audit, to see whether there's some room for improvement or something that we can do better to get a better result for the taxpayers.

[Pat Kelly]

The report left no question that there are inconsistencies. It didn't say that there “may be” inconsistencies; it said that there are inconsistencies. This isn't a matter of speculation, according to the report, and the report is quite clear that it's in the case of individuals, as opposed to other types of filers.

I don't think anybody disagrees that for a corporate entity or an individual or anyone with complicated affairs it may take more time to conduct and to conclude an audit, but when you ask for a document.... I'm sorry, but I do not find it acceptable that just because it is international, you would be given a longer period of time to comply. My answer would be that if you cannot comply with the law in the same way as an individual Canadian, then your problem lies in your strategy of tax filing or tax management, not in something that the CRA ought to roll over and accept as a reason. It's unfair to other Canadians; when they get a letter from the CRA that tells them they must drop everything and produce something for you, they do so.

Getting on to the inconsistencies that we find, this goes to the types of questions that I'm sure all members hear in their constituency offices when they take calls from taxpayers. In some parts of the country, it's taking up to 40 weeks, while in other areas it would take 12.

I want to focus on small business filers. I have heard complaints from taxpayers and from tax preparers about the length of time. I appreciate your saying that there's a reduction now in the time period for objections, but what about simple corrections for small business filers? I've heard from tax preparers that it's up to 18 months now in some instances, just for a keystroke error type of change.

Can you comment on corrections and what the timelines are on that? Do we have regional discrepancies in corrections?

[Bob Hamilton]

I'll respond to that question for sure, but on your previous question, just to close the loop, looking at the time frames for large, sophisticated taxpayers is something we have committed to looking at. Is there room for greater guidance, greater consistency, in that regard?

Similarly, on the individual side of things, we are trying to take some actions, such as calling people if we haven't heard from them, to try to have more of a conversation and defuse disputes before they arrive. It is an area we're looking at.

On the issue of corrections, I think in that space there can be differences across regions. One point we noted in our response was that the workloads vary across regions as well. To the extent that one region is doing a particular national workload for the whole agency, or that one has very complex sectors operating within their region, you can see some regional variations. I put that as a caveat on this whole thing.

As we look at it, we need to find substantively if we have variations. There's no doubt about that. We also need to recognize that we need to compare like with like. If there is a difference in a particular region for a good reason, we need to factor that into what we see.

In terms of how quickly we're processing reassessments, we have improved in that area. Last year we experienced some delays, for sure, in processing reassessments. It was due to a combination of factors. One was a reorganization we did within the agency. It had a transition period, so we were slower last year. I think now we've moved up to our service standard. If it's in paper-based form for a non-complex case, we endeavour to get that done within eight weeks 80% of the time. We're back on track.

I'd like to see us go even better and faster. Certainly, as you say, for a very simple change, we need to make sure those are finding their way into our system and processed as quickly as we can.

Again, those are areas we continue to look at as we try to make sure we're providing as good a service as we can to the taxpayers.

[The Chair, Conservative, Kevin Sorenson]

Thank you very much, Mr. Hamilton.

We'll now move to Mr. Christopherson.

[David Christopherson, NDP, Hamilton Centre, ON]

Thank you, Chair.

Thank you to all for being here today. We appreciate it.

To start off, Chair, I'd like to ask Mr. Hamilton if there's a particular reason he didn't do us the courtesy of giving us a copy of his opening remarks.

[Bob Hamilton]

No, there's no reason. Indeed, I thought we had. I certainly finalized them in time to make sure you had a copy.

[David Christopherson, NDP, Hamilton Centre, ON]

You thought it was done and it wasn't done.

[Bob Hamilton]

Yes. I'll find out why it wasn't.

[David Christopherson, NDP, Hamilton Centre, ON]

Okay.

This is your third visit in the last little while. Your first one wasn't very good. You made some reference to things you've done about it.

Your last one was really good. You were the shining light in the whole example.

Now you're back to bad again—really bad. Now we're mucking around with taxpayers' rights. Let's just lay the groundwork. This is from page 20 of the Auditor General's report:

Audit objective

The objective of this audit was to determine whether the Canada Revenue Agency applied the Income Tax Act consistently during compliance activities and accurately reported the results of its compliance activities.

This is from page 19:

Conclusion

We concluded that the Canada Revenue Agency did not apply the Income Tax Act consistently during its compliance activities. It treated taxpayers in similar situations in different ways. The Agency also did not accurately report the results of its compliance activities, and its reporting was incomplete.

That's pretty much a failure across the board, Mr. Hamilton. What's most troubling for me is what looks like a complete disregard for the Taxpayer Bill of Rights. Now, maybe it's not that bad—I'll listen to what you have to say—but the evidence tells me that it's not a priority.

Here's what I want to know. I have lots of stuff I can reference here, but I want to get straight to it. In things like the Taxpayer Bill of Rights, you're at the top of the house. If anything was your job, it was to make sure that the rights that Canadians have are protected. You failed. Why? Why did you fail in your personal job to make sure that the rights guaranteed in writing to Canadians were not upheld? Why did you fail Canadians?

[Bob Hamilton]

To address that head-on, the Taxpayer Bill of Rights is something that's very, very important to me and to the agency. When we see an instance that we're not respecting it, we take actions to make sure that we do.

I don't consider it necessarily as a complete failure. I see it as a challenge that we have to overcome. There may be cases out there when the tax system we run—with over 30 million Canadians and 40,000-plus employees—has something happen that needs to get corrected. I view it as my job to try to prevent those where I can, but when they happen, to fix them.

When we talk about things like consistency and inconsistency, it's very important for me to disentangle that to understand if it's comparing the same with the same. If two people are treated differently—or two corporations—that's not necessarily inconsistent, because they might be in different circumstances. As the AG referenced, if they are in similar circumstances, then they should be treated similarly.

I think that's what you see in the action plan that we put together, not only dealing with any inconsistencies that might be out there and trying to have systems in place that ensure we get rid of all of those, but also in our reporting—