Public Accounts Committee on March 20th, 2017

[The Chair, Conservative, Kevin Sorenson]

Good afternoon, colleagues.

This is meeting number 49 of the Standing Committee on Public Accounts, Monday, March 20, 2017. I would remind everyone today that our committee is televised.

Before we begin, I also want to welcome a representative of the public accounts committee of Kenya, who is in the audience today. We look forward as a committee to meeting with you after, but certainly we welcome you here today. You're accompanied by the first counsellor of the high commission, Mr. Afande. It's good to have you here with us.

Today we are studying Report 2—Income Tax Objections—Canada Revenue Agency, of the Fall 2016 Reports of the Auditor General of Canada.

Appearing as witnesses, we have today, from the Office of the Auditor General of Canada, Ms. Nancy Cheng, assistant auditor general; and Monsieur Jean Goulet, principal. Also, from Canada Revenue Agency, we have Mr. Bob Hamilton, commissioner of revenue and chief executive officer; and Mireille Laroche, assistant commissioner, appeals branch.

I understand that each of our witnesses today has an opening statement before we turn to questions from the members of Parliament on our committee. I would invite Ms. Cheng to proceed with an opening statement.

[Nancy Cheng, Assistant Auditor General, Office of the Auditor General of Canada]

Mr. Chair, thank you for this opportunity to present the results of our report on income tax objections. Joining me at the table is Jean Goulet, who is the principal responsible for the audit.

This audit focused on whether the Canada Revenue Agency efficiently managed personal and corporate income tax objections.

A taxpayer can file an objection if the taxpayer disagrees with the agency's assessment of an income tax return. The agency must provide an impartial and timely review of a taxpayer's objection. If not satisfied with the agency's decision on the objection, the taxpayer can appeal to the courts.

In the 2014 calendar year, the agency processed roughly 30 million income tax returns, worth about $235 billion in income taxes. During that time, taxpayers filed almost 67,000 objections that put $4.8 billion in income taxes into dispute. As of March 31, 2016, the agency had close to 172,000 objections outstanding, worth over $18 billion in income taxes.

To assess the efficiency of the objection process, we looked at the time the agency took to provide taxpayers with decisions on their objections. We also examined the various stages in the process to identify where delays occurred.

Our audit found that the agency took too long to decide whether a taxpayer's objection was right.

We found that the agency took about five months to settle straightforward objections, which made up about 60% of files. For medium-complexity objections, the agency told taxpayers they could wait up to a year before hearing from an appeals officer. It took the agency five or more years to resolve 79,000 cases worth almost $4 billion in income taxes.

During the five-year period covered by our audit, we found that 65% of the time, the agency ruled in whole or in part in favour of the taxpayer. When the taxpayer pays up front and the agency takes a long time to rule in favour of the taxpayer, costs are incurred not just for the taxpayer involved, but also for the economy as a whole.

We also examined the Canada Revenue Agency's performance targets for the objection process and found that the agency did not consider timeliness from the point of view of the taxpayer. For example, the agency did not count the days that it took to assign files to appeals officers. This means that the time to decide on objections reported by the agency was much shorter than the time taxpayers actually waited.

Without complete and accurate information on the time the agency takes to process an objection, taxpayers have no way of knowing how long they will have to wait for a decision. Furthermore, the agency has no way of knowing if it is getting better or worse at meeting its mandate for timely review of objections.

Assessment decisions that are overturned either by the agency's objection process or by the court's own appeal may signal issues with either the original assessment or the agency's subsequent reviews.

We found the agency did not adequately use the information coming out of its own decisions or of those of the Tax Court to learn and improve its processes and performance.

We made eight recommendations to the Canada Revenue Agency. The agency agreed with all of them and has committed to taking corrective action.

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 for your presentation.

We now welcome Mr. Hamilton.

Commissioner, welcome to this committee.

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

Thank you, Mr. Chair.

It is an honour to appear before the committee in my capacity as Commissioner of the Canada Revenue Agency. I am accompanied by Mireille Laroche, Assistant Commissioner, Appeals Branch. Ms. Laroche is responsible for the objections program.

In my first seven months in the job, I've had the opportunity to visit all of our regional operations, and I can attest to the pride, the professionalism, and the commitment of CRA's employees. Together we work to improve the service to Canadians, combat tax evasion and avoidance, and provide a fair and equitable administration of Canada's tax and benefits systems. These responsibilities are challenging, yet they are essential, and Canadians count on us to deliver our programs in a fair and trusted manner.

The objections program is an important part of ensuring fairness in the administration of Canada's tax laws. Through impartial reviews, it provides a resolution process when taxpayers disagree with a CRA decision.

Mr. Chair, as the Auditor General pointed out in his fall 2016 report, the CRA has been facing some challenges with respect to resolving objections in a timely manner. We have taken these findings seriously. We have accepted the eight recommendations, and we have been actively implementing solutions to them.

Before outlining our objections program strategy and early results, I will highlight the agency's overall performance in administering individual and corporate income tax laws.

Every year, the agency conducts roughly 66 million assessments and compliance activities, including 31 million personal and corporation income tax returns. Only 0.1% of these—or about 66,000 files—are the subject of an objection. Of those objections, 8% involve an alleged misapplication of laws, facts, or policies by the CRA. The agency takes great pride in quality decisions and service to Canadians.

Of course, we know there's room for improvement, especially in the area of timeliness and reporting to Canadians, and that's our first priority.

Our strategy to address the Auditor General's recommendations and provide better service to Canadians revolves around four themes. The first is communication with taxpayers. The second is reducing the inventory of files. The third is service standards and reporting. The fourth is learning from objections and appeal decisions.

On our first theme, we recently developed a comprehensive strategy to ensure we communicate clearly with taxpayers about their tax obligations and objections process. This has been an area where we haven't performed as well as we would like.

In November 2016, the CRA website was updated to explain our categorization of low, medium, and high complex cases; how to resolve typical tax issues such as how to submit new or additional information and how to request an adjustment rather than file an objection; how to object and under what circumstances; the need to provide all supporting documentation with an objection to speed up resolution of the issue; and the date of files currently being assigned by complexity level.

Historically, the agency has not shared its timelines for resolving objections with taxpayers. However, as of April 1 of this year, very shortly, we will publish on our website a new service standard for low-complexity objections and the actual time it takes to resolve low-complexity objections. We will also amend our acknowledgement letters to provide taxpayers with a clear understanding of how long it might take for them to receive a decision.

The second area is reducing the inventory of files. We are looking to reduce our inventory of approximately 166,000 objections. This includes two types of objections. The first is regular files, which are composed of distinct objections from individuals or businesses. The second is group files, which are composed of objections sometimes involving thousands of taxpayers who participated in tax avoidance arrangements or are disputing a common issue.

This issue of the inventory is very important for us as we try to address how we can provide better service because, at the moment, each new one that comes in gets added onto the inventory. We have to find a way to not only serve people who are giving us new objections but to take the inventory down over time.

On the group objections, an example of this kind of tax avoidance is a gifting tax arrangement where taxpayers receive a donation receipt that is for a greater amount than the actual cash donation. Group files represent 55% of our inventory. Due to the potential number of related objections, these files can unexpectedly increase our workload.

Group files are also treated differently from regular files due to the involvement of the courts to process them efficiently and consistently. Lead cases are identified, and the related objections are put on hold until the court's final decision is rendered and applied to them. This process can take years. Once a decision is made, the CRA uses a streamlined process to resolve group objections, but we must divert some of our resources from the regular objections workload to do so. This has had an adverse effect on our overall performance.

The CRA is prioritizing the reduction of regular objections inventory, which is composed of varying complexities and issues. As we develop our action plans, we are consulting government departments and other tax administrations that have faced similar inventory challenges, and are trying to incorporate their best practices.

In line with the Auditor General's recommendation, we are also conducting a series of reviews to identify areas with potential to reduce delays. For example, on April 1 of this year we will introduce a new process for low-complexity objections, which represent about 60% of our annual intake. In the past, taxpayers were contacted only after an objection was assigned to an appeals officer. If information was missing, even more time was required to resolve the file.

With our new process, taxpayers or their representatives will be contacted within 30 days of filing an objection to solicit any missing information. This way, files are complete and ready to be worked on once assigned to an officer. This will result in a more timely resolution process.

Automation and specialization of work will create further efficiencies and maximize resources, which will help us provide more timely service to Canadians. It won't happen overnight, but we are already making some progress to reduce the inventory of files and improve timelines on new objections. Thanks to funding from budget 2016 and some internal processing improvements, we're on track to resolve more objections in 2016-17 than initially predicted. But there's much more to do.

Our third theme is service standards and reporting. As I mentioned, we are introducing a new service standard for low-complexity objections—that is, to resolve them within 180 days 80% of the time. This standard reflects the fact that we have an aging inventory. As progress is made to reduce that inventory, the standard will be resolved for more timely resolution.

Next fiscal year, the objections program will implement a new approach to measuring workable time that will include all the time the objection is within the Government of Canada's control. Members of the committee can be assured that our metrics will better reflect the actual time it takes to review taxpayers' objections.

Our fourth and final theme is learning from objections and appeal decisions. While the agency respects and upholds its duty to treat objections impartially, it is essential to apply lessons learned from resolved objections and appeals to other areas of the CRA that process tax returns, conduct reviews of credits, and complete audits.

We have enhanced our quarterly feedback loop reports to provide information on the outcome of objections, including why an objection was allowed in part or in full. For example, we had successful results from the feedback loop related to the disability tax credit that led to a significant decrease in objections in 2016-17 and an increase in the percentage of assessments confirmed. This issue of the feedback loop and learning lessons from what has happened is a key part of our plan going forward. We haven't in the past always done as good a job of making sure we are incorporating the lessons we learn in one part of the agency to another. We'll be focusing on this as we go forward.

In closing, Mr. Chair, the transformation of the objections program, coupled with other improvements resulting from budget 2016 investments, will enable us to respond to the issues identified by the Auditor General in his report. By doing so, we will provide Canadians with better and more timely service.

We have an action plan to address those concerns. We will be implementing it aggressively, and we'll also be learning lessons along the way, as we try to find even better ways to provide better service to Canadians and a fairer appeals process.

I am happy to take any questions.

[The Chair, Conservative, Kevin Sorenson]

Thank you very much, Mr. Hamilton.

I want to thank you for coming and, to be quite honest, for appearing. We have, on a number of occasions, made requests of deputy ministers, or those who are responsible for the department, to appear. Many times, we have levels much lower than deputies appear. We do thank you for coming and for being in this role for such a short period, and yet appearing before this committee.

We'll now move to Mrs. Mendès, for seven minutes.

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

Thank you very much, Mr. Chair. I will be sharing my time with my colleague, Mr. Lefebvre.

Thank you all for being here, and I'll second our chair's comments on your presence. Madam Cheng, it's a pleasure to see you again.

I'm encouraged to hear you, Mr. Hamilton, say that many measures are being put in place in response to the report. I still have a few questions, and they go very much to the general message the Auditor General expressed in his fall report about the Government of Canada as a whole, the services offered by the Government of Canada as a whole, being very much focused on the how and not the what we are delivering to Canadians.

As a citizen who has to deal with Revenue Canada, like everybody else, and has to pay taxes, sometimes our dealings with Revenue Canada can be extremely hurtful, not just to say frustrating, but very hurtful. The feeling is that you are always in the wrong when you deal with Revenue Canada, and in my added case with Revenu Québec, which is another story. I've never had anything gone wrong. It is just the feeling you have when you actually have to deal with the agency.

How do you approach that in a much more general sense for the agency, how Canadians feel when they have to deal with the agency?

[Bob Hamilton]

The first thing I would say of a general nature is that the minister has received a pretty clear mandate from the Prime Minister to improve service at the agency, the service that we provide to Canadians.

While there have been occasions in the past where some people have felt the agency was not as sensitive or reasonable, as they could be, I think for the most part I'm very proud of the employees. There is a vast number of people, over 40,000 people who work in the agency, who are really trying to serve Canadians as best they can, but it is true there is room for improvement. That's the first thing that I would say overall. I will come back to the overall point.

As an example of how we're trying to change the focus of what we're doing, when we measured how long it took us to deal with an objection, we started the clock at one point and then we stopped it. Once it went outside the appeals branch, we stopped the clock, because the appeals branch wasn't in control of it at that point, so in some sense there was a logic.

We've turned it, and if you think of it from the taxpayer's perspective, the taxpayer doesn't really care if it's in the appeals branch or somewhere else in government. We'll be running the clock as long as government has control.

If we go back to the taxpayer and need additional information then that's fine. We can stop the clock for that purpose. We're trying, in our services here, to think more about what works for the taxpayer, not just what works for us. It has to be a blend of both.

Going back to your general point, we're trying to do that in all of the areas where we provide services. We've done some great things in terms of the electronic services that we provide. We've got new technologies to help serve Canadians, but there are some places where we just need to improve. We need to think more about how Canadians approach the tax system, and how we communicate with Canadians.

The tax system is a complicated beast, and sometimes we don't do everything we can to communicate effectively and explain it to people who may not understand it as well as we do. We're working on all of those avenues. We're working on improving our correspondence to make it a bit clearer in plain language. I can attest, as a taxpayer, to receiving my notice of assessment, and there have been some recent improvements. That's the kind of thing we're focusing on.

The effort to think about the service from the client's perspective is something that we're doing at the agency. At the end of the day, I should just add the caveat, we have to collect the money that's owed, and sometimes those can be difficult conversations. That doesn't mean we can't have them in a reasonable manner, and we will strive to do that.

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

Thank you very much.

[The Chair, Conservative, Kevin Sorenson]

Mr. Lefebvre, you have two minutes.

[Paul Lefebvre, Liberal, Sudbury, ON]

Thank you for being here this afternoon.

I'm just looking at the Auditor General's report. It says that between 2005 to 2015, there was an increase in income tax objections of around 171%.

My first question is: why? This is very high. This is not just a blip over the years. There has to be an underlying reason. Before we can address how to resolve it, we have to ask why.

Then I looked at paragraph 232, “Management of growing inventory”. It says:

The Appeals Branch of the Canada Revenue Agency had experienced steady growth in the number of taxpayer objections. Agency officials told us that the growth was a result of both the taxpayers' actions and the Agency's own efforts to identify and reassess taxpayers who were not paying their fair share of income tax.

All of a sudden, 10 years ago, taxpayers started to learn that they had these rights to object, and/or at the same time, in parallel, the CRA was doing a better job of identifying people's income tax. Is that the basis of the answer, or is there more to this?

[Bob Hamilton]

That covers part of it. I might express it slightly differently, but yes, there was a time when the agency started to focus more on auditing, certainly in the area of tax-gifting shelters that I had mentioned earlier, where people were engaged in avoidance activities.

[Paul Lefebvre, Liberal, Sudbury, ON]

There were avoidance activities way back in the late 1990s as well. There were the art flips and a lot of the tax shelters and tax avoidance stuff going on.

[Bob Hamilton]

Right. There would always be avoidance activity, but the agency put additional resources into auditing those activities and cracking down, if I could use that term.

What that leads to—and this is another one of the lessons we're learning—is that when you do that, either that activity increases or our auditing of that activity increases, you generate work for the appeals branch, because a high percentage of those cases typically would end up getting appealed.

[Paul Lefebvre, Liberal, Sudbury, ON]

Yes.

[Bob Hamilton]

That activity, uncovering those, led to more appeals, and that was a factor—not the only one, but it was a big factor in that growth in the inventory.

[The Chair, Conservative, Kevin Sorenson]

Thank you, Mr. Lefebvre.

I will now move to Mr. Aboultaif. Welcome to the committee.

[Ziad Aboultaif, Conservative, Edmonton Manning, AB]

Thanks, Mr. Commissioner, and thanks to the panellists today for attending before committee.

Mr. Commissioner, we hear a lot about the CRA and how it is treating taxpayers, or serving taxpayers, if you wish. Most of the letters we receive are negative.

I've just found about four letters that have come from taxpayers. I would like to read them, and I hope we can get some good comments from you on all of them.

One says:

My tax filings have been audited for two consecutive years, though there was and is nothing dishonest or sneaky in either filing. My claims have already been accepted for 2014, and I've been waiting for 22 weeks now for a resolve of the 2015 filing.

A second one says:

CRA agents with whom I've spoken are sometimes borderline rude, or stressed to the point of hysteria. One agent told me that responding to a submission or service complaint can take a year or more; though the “service standards” on the CRA website claim that the CRA will respond to a submission within 8 weeks, 100% of the time.

A third one says:

In early 2014, I started to receiving letters from the CRA stating that I owed them approximately $230,000.00 in back taxes. This was an absurd amount of money. In 2015 the CRA forwarded me all my “T” slips for years 2008 thru 2014 and when I completed my returns my calculations showed that I owed the CRA approximately $26,000.00. Even with interest and penalties the amount could be nowhere close to $230,000.00. If the CRA had all my “T” slips how could there be a $200,000.00 plus difference in their assessment? What the CRA did was either an act of malice or negligence, and was tantamount to harassment, bullying, and was a blatant use of intimidation tactics in order to carry out their mandate.

The last one says:

All a CRA representative had to do...was look at the return and the paperwork.... It should have been cased solved...but instead of someone at CRA simply looking at the paperwork, that threatening letter was sent to an 83 year old woman who knows nothing of CRA, their workings or the tax laws. It upset her. But in the end...five months later, it was solved. It all could have been avoided.

Mr. Commissioner, every member of Parliament, I believe, has received letters similar to these. What are we supposed to tell our constituents who feel they are being bullied and harassed by the CRA?

Thank you.

[Bob Hamilton]

I won't be able to respond to every individual case that you raised here, as you can imagine.

I get some letters myself from taxpayers giving us feedback. I have to be honest and say that more of them are negative than positive. I guess what I would say is that we are striving to provide better service. A couple of the things you referred to are things we are trying to do better, and that's without responding to those cases, because there could be facts that I'm not aware of.

We are trying to make sure that, where we have a piece of information from a taxpayer, we use it. There certainly have been examples in the past where in one part of the organization somebody had information, but somebody else was dealing with the taxpayer and didn't have access to that information. We're trying to fix that. We're trying to think of the agency more as an integrated whole and connecting the silos together. That's one example where we could try to do a better job to make sure that we have the right information.

The second thing is that when we correspond with the taxpayer, making sure that it's respectful correspondence and in some ways helping to educate why we're doing what we're doing. Hopefully, we won't make mistakes. However, if we do, they could be uncovered in a way that's constructive and productive. We are trying to look at our correspondence, look at how we train people.

I would say, on behalf of the 40,000 people who work in the agency, the vast majority of cases are where we can actually help taxpayers. I've sat in on calls with taxpayers where people on the other end are quite stressed because the tax situation is difficult. Our agents have been able to help them through that, to explain that if they're in financial hardship there can be ways to get around it, or here's the explanation for it.

We can do a better job, and that is part of the service mandate we are trying to push for our minister. We can try to minimize the number of mistakes that we make. In a big organization, with all of the returns that we process, there will probably always be some cases, unfortunately. But we are actively trying to improve the service we provide, using the best tools we can, intelligence and technology, and being sensitive in how we communicate.

[Ziad Aboultaif, Conservative, Edmonton Manning, AB]

Thank you.

We know that your clients are the taxpayers, so eventually, in a business sense, if we build a good relationship with the clients, the operation will be more efficient and the investment will be less, rather than just changing course.

How happy are you, being on the job for a few months, with the culture of CRA? I heard the minister claim that it will be a client-friendly agency, but the letters keep coming our way, and we keep hearing the negatives. I hope that a change of culture will help the business to prosper and be less costly. The return on the investment will be much quicker, and people will be less hassled.

Can you comment on that?

[Bob Hamilton]

The comment I would make is that we are looking at the service culture in the agency and doing quite a bit of work to see how we can improve, and what we can learn from other jurisdictions and other operations. The one thing I've been focusing on is trying to make sure that this culture applies throughout the organization.

For example, one could think of an auditor who has the responsibility to get the taxes that are owed, but we've been communicating that those auditors have a role to play in providing service to Canadians as well. Yes, we want to get the taxes that are owed so that the taxes are distributed fairly across all Canadians. However, if we can have a respectful conversation with the taxpayer, and in some cases educate them as to why the tax system works this way and why we're doing this, then I think we'll probably not only improve that transaction, but down the road there should be fewer problems. I think that is the point you're making. If we can adopt that service culture, we may be helping ourselves in getting the taxes that are owed to us as well.

It's trying to make sure that this is throughout the organization, across all regions of the country. That's one of the things that in the few months I've been on the job I've been trying to emphasize for people, to communicate better internally and with taxpayers.

[The Chair, Conservative, Kevin Sorenson]

Thank you very much, Mr. Hamilton and Mr. Aboultaif.

Mr. Christopherson, for seven minutes, please.

[David Christopherson, NDP, Hamilton Centre, ON]

Thank you to our guests for appearing today.

Chair, with your indulgence, I would on behalf of all of us welcome you back. We did that at an earlier in camera business meeting, but I think the kind of co-operation and team spirit that we have here in this committee warrants a public welcome. You've been off sick with a fixable health issue—

[The Chair, Conservative, Kevin Sorenson]

That's right.

[David Christopherson, NDP, Hamilton Centre, ON]

—that is now fixed, and it's good to see you back in the chair. We're pleased to have you here, and hopefully all your health issues are now behind you.

[The Chair, Conservative, Kevin Sorenson]

Knee replacement: it could have been worse.

Thank you.