Opening Statement to the Standing Committee on Finance

Canada Revenue Agency—Resolving Disputes and Encouraging Voluntary Disclosures
(Chapter 6 - November 2004 Report of the Auditor General of Canada)

3 February, 2005

Andrew Lennox
Assistant Auditor General

Mr. Chairman, thank you for this opportunity to appear before the Committee to discuss our audit of the Canada Revenue Agency’s Appeals Branch. The results of the audit were reported in Chapter 6 of our November 2004 Report. The Auditor General sends her regrets as she is unable to be here today. I am the Assistant Auditor General responsible for our audit work at the Canada Revenue Agency. Joining me at the table is Jamie Hood, the principal responsible for this audit.

The audit dealt with two key functions in the Agency’s Appeals Branch. The first is the resolution of objections to income tax and GST assessments and reassessments. The second is the administration of the Voluntary Disclosures Program. I will address each of these separately.

Taxpayers and GST registrants who disagree with assessments by the Agency on income tax, GST, and excise tax matters can file an objection with the Agency. Affected parties who disagree with the Agency’s rulings and assessments on Canada Pension Plan and Employment Insurance can appeal. These objections and appeals are reviewed by the Agency’s Appeals Branch.

We found that the Branch is resolving most of the income tax and GST objections it receives and is doing this in a way that is fair and impartial. I should note that we are encouraged by this positive conclusion. The same findings also apply to appeals of Canada Pension Plan and Employment Insurance rulings and assessments.

We also found that over half of the objections the Branch receives are resolved within the timeliness goals that the Agency has set. However, under the legislation, taxpayers can appeal their case to the Tax Court of Canada if they have not received a decision from the Appeals Branch 90 days after filing their objection. While we noted that most taxpayers appear willing to wait for an administrative decision before appealing to the courts, we are concerned that many of the Branch’s timeliness goals for income tax objections exceed 90 days by a large margin.

Let me now turn to the Voluntary Disclosures Program. The program allows taxpayers and GST registrants to correct past errors or omissions, without penalty or prosecution and sometimes with reduced interest. For example, a GST registrant who has collected GST for a number of years but never remitted it to the Agency can request a voluntary disclosure. If the request is accepted, the registrant would remit the GST and some interest, but would avoid the penalties and possible prosecution that would follow if the Agency had discovered the omission.

Taxpayers and registrants have responded well to the program; in the last four years, the number of requests has more than doubled.

Administering the program is a difficult balancing act. On the one hand, officers want to encourage taxpayers and registrants to correct past errors or omissions and become compliant. On the other hand, they need to ensure that the program is fair to compliant taxpayers and registrants and is not seen as a free ride or a reward for non-compliance. This calls for a lot of judgment on the part of officers and solid support from headquarters. We found that the program is not administered consistently across the country, and we are concerned that the balance is not being maintained. Taxpayers and registrants who make a voluntary disclosure have a right to expect equal treatment across the country.

We also raised a concern about a contradiction between the information given to Parliament regarding the intended uses of the legislative authority supporting the program and the way that authority is actually being used. This issue may be of particular interest to this Committee.

Let me say at the outset, that the Agency is not doing anything illegal. The wording in the Income Tax and Excise Tax Acts is very clear—the Minister of National Revenue has the authority to waive or cancel all or any portion of any penalty or interest otherwise payable under the Acts.

However, we found that when the relevant subsection of the Income Tax Act was introduced in 1991, the Department of Finance told Parliament in its Technical Notes that the Minister’s discretion to waive or cancel penalties and interest would generally be used in cases where taxpayers had encountered extraordinary circumstances that were beyond their control, such as floods, fires, strikes, etc. Further, Parliament was told that the minister would not use the provision unless the taxpayer had taken a reasonable amount of care in attempting to comply with the requirements of the Act.

In the case of the Voluntary Disclosures Program, many of the disclosures relate to income that was intentionally never reported. Using the relevant subsection of the Income Tax Act to waive the penalties and some of the interest on those disclosures is inconsistent with what Parliament was told in the Technical Notes. However, it is up to Parliament to decide whether the Agency has gone beyond what Parliament intended the subsection to be used for.

Mr. Chairman, that concludes my opening statement, and we would be pleased to answer your Committee’s questions.