Verifying income subject to third-party reporting

3.31 To improve the results of the matching program, the Agency should

• fully document and support the basis for selecting returns to verify; and
• verify returns in decreasing order of expected income tax recovery, in its work aimed at tax recovery.
  (3.19–3.30)

The Agency agrees to fully document and support the basis for selecting returns to verify.

With respect to verifying returns in decreasing order of expected income tax recovery, the Agency agrees that case prioritization is important. However, it is not the only criterion that needs to be taken into consideration to produce better results for this business line.

The Agency will study how to improve its matching process to ensure that resources are expended on the best cases and is in the process of analyzing several alternatives to improve its current practices.

3.34 The Agency should develop and implement a strategy to make better use of information returns on tax shelters, partnership income, and flow-through shares in its compliance activities for personal income tax returns.
(3.32–3.33)

The Agency recognizes the importance of effectively utilizing information returns in its compliance activities. While the information received on tax shelter returns, flow-through share returns, and partnership returns is not designed to be automatically matched to taxpayers' files, the Agency does, as the Auditor General notes, use the information on tax shelter returns and on flow-through share returns to evaluate tax risk for audit purposes, and to verify compliance with tax laws. Concerning partnership returns, the Agency instituted a pilot project in April 2005 to assess the benefit of capturing partnership information into an audit database to improve risk ranking for audit purposes. The Agency will use the results of the pilot project to determine how best to utilize information returns in its compliance activities.

Measuring and reporting compliance

3.43 To better understand trends in taxpayer compliance and to better measure and report on how effective the processing review and matching programs are, the Canada Revenue Agency should

• report longer-term trend information on taxpayer compliance;
• explain significant changes in compliance patterns and how it is addressing them;
• report statistically valid information on the estimated tax impact of non-compliance with the rules for reporting deductions and credits, and for reporting income subject to third-party reporting; and
• report on its performance in identifying and assessing the related amounts.
  (3.35–3.42)

The Agency does currently report internally on long-term trend analysis, which includes identifying both changes in compliance patterns as well as action plans to address these changes. We will extend this reporting to ensure relevant information is included as part of the annual report to Parliament.

The Agency agrees to forecast potential revenue at risk for both the processing review and matching programs. We will commence estimating this value for these programs and also commence measuring our actual revenue recoveries against these estimates to broaden our program evaluation capacities. For the processing review program we are in a position to do so immediately (and in fact have done so effective for the 2004–05 Annual Report). However, the matching program recently implemented a new system that allows it to capture the required data. Therefore, as historical data is not currently available, it will be at least three to five years before we can estimate this value to an acceptable degree of accuracy.

Verifying income tax returns from domestic trusts

3.57 The Agency should

• systematically evaluate the tax at risk in domestic trusts when it selects income tax returns to verify;
• require trusts to submit a statement of assets and liabilities with their trust income tax returns;
• capture and compile information on corrections and develop reports to assist in, and account for, the management of trust assessing activities;
• complete its examination of the amounts recorded in its databases for income allocated to beneficiaries on 2003 trust tax returns and on 2003 information slips and determine the tax revenue implications, if any, of the differences identified; and
• implement a compliance program to ensure that domestic trusts are properly reporting the income they have allocated to beneficiaries on information slips.
  (3.45–3.56)

Given the dynamic and evolving nature of trusts, the Agency is reviewing its approach to verifying domestic trust income tax returns, including analysis and consultations on the benefits and costs associated with requiring trusts to submit a statement of assets and liabilities with their income tax returns.

The Agency agrees with the recommendation to capture and compile information on corrections and develop reports to assist in, and account for, the management of trust assessing activities. In that regard, the Agency will build on its recently implemented Quality Evaluation Program to enhance its capacity to evaluate and manage trust assessing activities.

The Agency will complete its examination of the amounts recorded in the databases to ensure that there are no tax revenue implications.

Many situations do not require the filing of information slips. For all others, the Agency is evaluating this recommendation and the implications of more closely linking existing databases and enhancing the filing compliance of domestic trusts with respect to information slips.