Canada: Some Changes Ahead For The Tax Objection And Appeal Process Of The Canada Revenue Agency

On November 29, 2016, the Auditor General of Canada released the 2016 Fall Reports, including "Income Tax Objections", regarding the Canada Revenue Agency's (CRA) management of income tax objections. This bulletin provides an overview of the Report and highlights its recommendations and the CRA's responses and plans for improvement.

The Office of the Auditor General sought to answer a simple question: Is the CRA effectively managing income tax objections? In answering "no", the Report found that the CRA did not generally:

  1. Process income tax objections in a timely manner
  2. Adequately measure its performance results, and its performance indicators were incomplete and inaccurate
  3. Adequately review decisions on income tax objections and appeals and did not share the results of these objections and court decisions within the CRA

REPORT OVERVIEW

The Office of the Auditor General conducted an independent examination (Audit) of the CRA's Appeals Branch to provide objective information, advice, and assurance to assist Parliament in its scrutiny of the government's management of resources and programs.

The Audit covered the period between April 1, 2011 and March 31, 2016 and focused on objections and appeals related to personal and corporate tax returns. The Audit sought to determine whether the CRA was efficiently managing income tax objections. To assess efficiency, the Audit examined the time the CRA took to provide taxpayers with decisions on their objections. To identify where delays occurred, the various stages in the objection process were reviewed. The Audit also considered how the CRA used and communicated information internally on the results of objections and court decisions.

FINDINGS, RECOMMENDATIONS AND RESPONSES

What follows are the highlights of the Report's findings and their implications, as well as the Report's recommendations and the CRA's responses to such recommendations as well as their plans for improvement. Various charts depicting the number, outcome and tax amounts involved in group and non-group objections can be found in Schedule A. "Group" files contain objections with respect to the same claims, or similar claims, that the CRA may consider to represent tax avoidance. For efficiency and consistency, the CRA does not typically process "group" files until a final decision is made on a lead case. The Report focused on non-group files and this bulletin does the same.

The report highlighted and made recommendations on the following six problem areas:

  1. Timing: The CRA did not resolve income tax objections in a timely manner and did not effectively communicate expected delays to the taxpayer.

The Report compared the CRA's performance to that of similar tax administrations in six other countries and found that Canada took the longest to resolve objections. Canada took an average of 276 days compared with an average of 70 days for the other six countries, according to data from 2009, contained in an international benchmarking study reported in 2011 by the United Kingdom's tax authority, HM Revenue and Customs.

The CRA's acknowledgement letter to the taxpayer's notice of objection did not provide an estimate of the waiting period to resolve the objection, and this information was not publicly available. The taxpayer remained unaware at the time of filing how long it could take the CRA to resolve the objection.

Recommendation: The CRA should provide taxpayers with the time frames within which it expects to resolve their objections and the time frames should be based on the objections' level of complexity.

Response: The CRA agreed and explained that this information will be provided to taxpayers within the 2016–17 fiscal year. It also explained that expected and actual time frames related to complexity will begin to be shared with the general public on the CRA's website by March 31, 2017. Also, by the end of the 2016–17 fiscal year, the CRA will clarify, on its external website, the steps to resolving taxpayer disputes, including the requirement to provide any relevant information.

  1. Management of growing number of objections: The growth rate in the number of new objections far outpaced the increase in resources the CRA dedicated to managing them. Specifically, in the past 10 fiscal years, the number of outstanding income tax objections increased by 171 per cent, from 63,384 to 171,744, while the number of employees dedicated to resolving these objections increased by only 14 per cent, from 998 to 1,138.

Recommendation: The CRA should develop and implement an action plan with defined timelines and targets to reduce the number of outstanding objections to a reasonable level.

Response: The CRA agreed and explained that, by early 2017, it will develop a strategy for reducing the backlog of unresolved objections in order to respond to taxpayers in a more timely fashion.

  1. Processing times and reasons for delay: Processing of objections was often delayed because notices of objection sent by taxpayers were missing information. The appeals officer was usually the first to identify such missing information and most objections were not assigned to appeals officers until, on average, 150 days after the taxpayer had mailed the notice of objection. This caused delays in requesting the information from taxpayers and such delays hindered the CRA's ability to resolve objections in a timely manner.

When seeking technical assistance from other areas within the CRA, appeals officers sometimes waited months, or even years, before receiving responses to their referrals. Six per cent of the resolved objections needed to be referred elsewhere within the CRA and the appeals officers waited, on average, 401 days to receive a response.

Why is this important? Taxpayers need to know how long the objection process is likely to take because this information could affect their decision to object to an assessment. The CRA charges interest and penalties on taxes assessed, but not on taxes paid. A taxpayer who files an objection generally may pay all or part of the amount in dispute up front or may choose to wait for the CRA's decision. Taxpayers that are "large corporations" must in any event pay 50 per cent of the tax in dispute and if they are ultimately successful, will receive only a modest "prescribed" interest refund on these amounts, and that refund is itself taxable.

Recommendation: The CRA should conduct a complete review of the objection process to identify and implement modifications to improve the timely resolution of objections.

Response: The CRA agreed and explained that, beginning in fall 2016, it will conduct a review of the objections process. To ensure that files are complete when assigned to appeals officers, beginning in the 2017–18 fiscal year, taxpayers will be contacted to provide missing information as part of the initial step when objections are received.

  1. Performance measurement indicators: The CRA's method of measuring timeliness was neither consistent nor complete and did not provide an accurate measure of the time it took to process an objection.
    1. Definition of "timely": The CRA did not define what constituted "timely", and consequently could not determine what would be considered a reasonable amount of time for resolving objections.
    2. Indicators and external reporting: The CRA had not developed a complete set of indicators for measuring the time it takes to process an objection. Its indicators only considered the objections' complexity. There were no indicators for other steps in the objection process, such as timelines for assigning an objection to an appeals officer or for processing a referral. There was also no overall indicator for the time the CRA should take from its receipt of the notice of objection to its resolution of the objection.
    3. Data errors: The CRA's information system did not have sufficient controls in place to ensure data integrity. For example, it was possible to enter a date for completing an objection that preceded the date for receipt of the objection, and in such cases, the error was not flagged by the system.

Why is this important? The CRA cannot determine whether it is meeting its mandate for the timely review of objections if it cannot accurately measure its performance.

Recommendations:

  1. Definition of "timely": The CRA should define what it considers to be a "timely" resolution of an objection.
    Response: The CRA agreed and explained that, for the 2017–18 fiscal year, it will implement and publicly report a standard for the resolution of low-complexity objections, which represent approximately 60 per cent of objections. This standard will be to respond to taxpayers within 180 days, 80 per cent of the time.
    The CRA will also establish a measurement for the timely resolution of medium-complexity objections, which represent 35 per cent of objections, by the end of the 2016–17 fiscal year, and publish this measurement in the 2017–18 fiscal year.
  2. Indicators and external reporting: The CRA should modify its performance indicators so that it can accurately measure whether it is providing a timely review. These indicators should include all steps in the process and should be consistent year-over-year so that the CRA can assess its performance over time. The CRA should also report these indicators, related targets and results to Parliament, and communicate them to taxpayers.
    Response: The CRA agreed and explained that it is currently introducing new indicators for the timely review of objections and that such indicators will be included in its Departmental Performance Report. It will also publish a description of the complexity of objections on its website by the end of the 2016–17 fiscal year.
  3. Data errors: The CRA should add appropriate controls to its objection process and its information systems to ensure the integrity of its data.

Response: The CRA agreed and explained that new data validities will be incorporated into the current system in upcoming release cycles in fall 2016, in May 2017, and on an ongoing basis.

  1. 65 per cent of objections in favour of taxpayers: 65 per cent of objections reviewed by the CRA were decided in favour of taxpayers for either all or part of the disputed tax amounts.

Of these decisions, C$6.1-billion in assessed taxes, out of a total C$11.6-billion in dispute, were favourably allowed to taxpayers. The CRA also cancelled almost C$1.1-billion in penalties and interest related to the objections.

In many cases, the objections were allowed in full or in part because the taxpayer provided additional information that supported the objection.

Why is this important? A high rate of objection decisions in favour of taxpayers may indicate problems with the assessments.

Recommendation: The CRA should review the reasons objections are decided in favour of taxpayers so that it can identify opportunities to resolve issues before objections are filed.

Response: The CRA agreed and explained that quarterly reporting, containing reasons for objections decisions, will be issued to audit and assessing areas starting in the third quarter of the 2016–17 fiscal year.

  1. Communication of results within CRA: The CRA did not adequately share information about the results of objections or appeals with the CRA's auditors, assessors, or appeals officers. This restricted the ability of the CRA to learn and improve its performance.

Why is this important? Assessment decisions that are overturned through the objection process or through the courts may signal inconsistencies in assessment or objection processes. Sharing information about overturned assessments could ultimately reduce the numbers of objections and appeals.

Recommendation: The CRA should ensure that decisions on objections and appeals are shared in such a way that those performing assessments can use that information to improve future assessments.

Response: The CRA agreed and explained that it is committed to ensuring that objections and appeals decisions are shared with all assessing and audit areas.

POSSIBLE TAXPAYER IMPLICATIONS

Pros

  1. The CRA's suggested changes may give rise to some benefits for taxpayers: faster service and speedier resolution of disputes. Objections will likely be resolved more quickly if taxpayers are contacted to provide missing information as part of the initial step when objections are received.
  1. A reduced backlog may enable CRA personnel to consider the merits of a taxpayer's objection thoughtfully and without haste.
  1. There should be improved access to justice for individuals who hope to resolve matters without the need to go to tax court, when matters involving certain tax credit and tax deduction claims are in issue.
  1. Assessment decisions that are overturned in the objections process or through the courts might more clearly signal inconsistencies in the CRA's assessment and/or objections processes.
  1. The sharing of information about overturned assessments might help assessors, auditors and appeals officers to deliver more accurate and more consistent decisions and to not make similar mistakes. These actions could ultimately reduce the numbers of objections and appeals.

Cons

  1. The proposed changes may also lead to a greater number of tax court appeals and fewer matters successfully settled at the CRA internal appeals level given the greater scrutiny about results and timelines. Some CRA appeals officials may choose not to allow objections given the need to resolve matters quickly or may not settle matters favourably to a taxpayer's satisfaction within the timelines prescribed to complete a file.
  1. It is not likely that the Report's recommendations will give way to the speedier and more frequent resolution of complex tax objections and appeals involving transfer pricing, avoidance transactions and perhaps even scientific research and experimental development. CRA officials likely will continue to refer these matters for review by other CRA personnel, resulting in a lengthy review process, often without any resulting resolution of the dispute.

CONCLUSION

The CRA has indicated that it will implement procedural changes at the beginning of 2017. Taxpayers should still expect delays in the processing of objections until the backlog is reduced.  

To view the rest of the article, please click here

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Events from this Firm
23 Nov 2018, Other, Toronto, Canada

Cybersecurity, including data privacy and security obligations, has become a critical chapter in every company’s risk management playbook.

28 Nov 2018, Speaking Engagement, Toronto, Canada

Arbitration has a number of advantages and some disadvantages for the resolution of domestic and international commercial disputes.

Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions