On May 6, 2014, the Auditor General ("AG") released his spring report.1 Chapter 3 of the AG's report dealt with the CRA's approach to aggressive tax planning ("ATP"), focusing on how the CRA manages its ATP program as well as how the Department of Finance responds to requests for new legislation to combat ATP. Overall, the AG concluded that the CRA's ATP program had tools to detect, correct and deter non-compliance. However, there is a need to evaluate the National Risk Assessment Model ("NRAM"), weaknesses in ATP performance measurements and a need to improve the monitoring of training.
The CRA has identified ATP as one of its highest compliance risks and administers an ATP program to identify tax avoidance arrangements and products and to administer the general anti-avoidance rule ("GAAR"). The AG's report identified four types of tax plans that were used for the AG's evaluations, namely:
- Offshore insurance: Allows businesses to swap their Canadian insurance portfolio with a foreign portfolio using a foreign affiliate to generate income that is not taxable in Canada ($9.8B cost to the fisc between 2006 and 2013 with no anti-avoidance measures yet in place);
- RRSP strips: Allowed individuals to "strip" funds tax-free from locked-in RRSPs, then receive income tax receipts significantly greater than their contribution ($22M cost to the fisc – stopped by Budget 2011);
- Stock dividend value shifts: Creation of artificial capital losses to offset a capital gain arising on property dispositions ($3.5B cost to the fisc – successfully challenged by the Crown in court);
- Tech wrecks: Made it possible to transfer tax losses between unaffiliated corporations, so named because of the proliferation of tax losses in the tech sector ($3.5B loss to the fisc – stopped by Budget 2013).
These arrangements were identified within the CRA by field auditors as well as within the CRA's Rulings Directorate.2 The AG findings were as follows:
- The CRA has not fully evaluated whether it detects high-risk large business files: The AG recommended that the CRA develop systematic processes to identify high-risk files. For example, in 2010-11, the International and Large Business Directorate phased in a large business program, requiring all large businesses to be assessed annually under the NRAM. In response to the AG's recommendation, the CRA agreed that the NRAM must be evaluated by reviewing audit results and confirmed that evaluation would be completed by 2014-15.
- The CRA had success correcting non-compliance: The AG report summarized CRA actions when ATP is identified: the CRA first seeks to apply a technical provision or specific anti-avoidance provision, failing which the GAAR may be considered. The CRA may also liaise with Finance. According to the AG's report, in 2012 80 ATP cases were referred to the GAAR Committee and the GAAR was found to apply in 96% of those cases. The AG's report also confirmed that since the GAAR was introduced in 1988, the GAAR Committee has determined that the GAAR applied in 897 of 1,163 cases referred. Of the 54 GAAR cases that have gone to court, the Crown prevailed in 28 cases. Finance will often wait until a case has been resolved before considering legislative change and if the case is lost the adverse decision committee will meet to discuss options.
- The CRA trains auditors but does not track auditor training on ATP: ATP is complex and promoters of ATP adjust plans when ATP is detected. Therefore, auditors must have a solid legislative understanding and awareness of ATP. However, the CRA was unable to demonstrate that the learning path for ATP auditors had been executed, perhaps because training is administered at the TSOs with limited feedback to headquarters. The AG was satisfied that the CRA had communicated with its ATP staff in relation to the four ATP test cases listed above. The AG recommended that CRA monitor the progress of ATP auditors, identify gaps and provide training. The CRA responded that it would have a framework by October 2014 and be better positioned to evaluate needs by March 2015.
- Third-party penalties: Between the 2009/10 and 2012/13 years, the CRA recommended to the Third-Party Penalty Review Committee that penalties be applied in 118 cases, of which 48 cases were approved, 22 cases denied and 48 cases remained under consideration. The median penalty amongst the 48 approved cases was $440,000, resulting in total penalties of $63.3M.
- The CRA should revisit measurement of ATP program
performance: Three indicators of performance were
considered, namely; utilization of budgeted salary; tax earned by
audit ("TEBA"); and quality of file
assessments. The AG's report made the following
- The CRA used 90% of its salary budget for the ATP program in 2012/13.
- TEBA is an internal measure of tax adjustments resulting from the program (not individual auditors), excluding adjustments initiated by a taxpayer. While TEBA targets were exceeded in 2010/11 and 2011/12, the increased 2012/13 target was missed due to extenuating factors. Although TEBA is a useful measure of immediate results of a program, it doesn't predict long-term success because it doesn't measure deterrent effects – in other words, as enforcement and legislative change increasingly deters ATP, there would be fewer reassessments.
- The CRA defines a quality audit as one selected based on sound
risk assessment with proper planning and execution with established
policy, procedure and legislation. Poor risk assessment means more
taxpayer appeals or auditors missing significant reassessments. In
2012 and 2013, 11% of sampled files were sent back because the
audit work was deficient.
The CRA has taken steps to evaluate ATP program success, which the AG encouraged, and was also co-operating with other jurisdictions to develop metrics for success. The CRA agreed it should improve its ATP measurement and anticipated having a list of performance measures ready by March 2015.
- The CRA submits ATP issues to Finance: The CRA's Legislative Policy Directorate connects the CRA and Finance to communicate issues identified by the CRA. However, the AG could not make any conclusions about the process by which CRA recommendations are considered and acted upon by Finance, because Finance determined that information about its process was a "Cabinet confidence" outside the scope of the AG's entitlement to information access.
The Spring 2014 AG report is helpful since it provides taxpayers and practitioners useful insights into the operation of the CRA's ATP program and tells us what we may expect from the CRA in the future as it seeks to implement the AG's recommendations.
1 The AG report covered the period of April 1, 2010 to November 30, 2013 and included interviews with CRA auditors, team leaders and managers in tax services offices ("TSOs"), management within CRA headquarters and Finance, and a review of ATP documentation provided by the CRA and Finance.
2 It's understandable that Rulings provides useful ATP information, since it receives information about many transactions and can track tax trends. ATP may also be identified by: risk-based audits (including large business audits and related party initiatives which manage the compliance of individuals and families with net worth exceeding $50M); voluntary disclosures; informant leads; ATP reporting; and public information including details available on the Internet and tax forums.
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