Opening Statement to the Committee on Public Accounts

Revenue Canada - Underground Economy Initiative (Chapter 2 - April 1999 Report)

Mr. Chairman, thank you for the opportunity to present the results of our audit of Revenue Canada, now called the Canada Customs and Revenue Agency, on the Underground Economy Initiative.

In past audits we have also dealt with other Revenue Canada programs to combat the underground economy. We previously reported on Revenue Canada's special investigations and non-filers programs for both GST and income tax and for various other enforcement programs. We also reported on the legislative requirement to report foreign assets.

As we said in our report, tax evasion is not a victimless crime. It puts honest businesses at a competitive disadvantage and, in some cases, out of business. It also causes honest taxpayers to bear the tax load of those who cheat. The integrity of the tax system is based on the public belief that Revenue Canada operates with the basic expectation that everyone must and does pay his or her fair share of taxes due under the law.

In his February 1994 budget speech, the Minister of Finance noted that when an increasing minority avoid paying their fair share of taxes, the legitimacy of the tax system suffers.

Our Report noted that the underground economy results in tax evasion and represents an estimated loss of federal and provincial tax revenues of up to $12 billion each year.

Revenue Canada has always had compliance programs to combat tax evasion. However, in the early 1990s, there was a general perception that the underground economy was a growing problem.

To deal with this problem and to preserve the integrity of the tax system, Revenue Canada announced a new initiative in 1993 to combat the underground economy by allocating an additional 200 staff to its non-filers and non-registrants program and 1,000 staff to the audit of small businesses. Thirty-five percent of the Department’s audit staff for small and medium-sized businesses are now involved in the Underground Economy Initiative audit activities.

The Initiative was intended to increase the chances that unreported income would be detected, to enforce the payment of taxes from unreported income, to develop new activities to support taxpayers in meeting their responsibilities and to deter taxpayers from participating in the underground economy.

Planned activities for the Initiative included encouraging voluntary compliance through community visits to business establishments, educating the public, partnerships with other governments and business organizations, enforcing compliance by auditing in areas of high non-compliance and supporting compliance efforts with additional research.

The Initiative as planned was, in our view, a balanced approach to combatting tax evasion in the underground economy.

I would now like to spend a few moments talking about the results of the implementation of the Initiative.

Through the Initiative, Revenue Canada has recovered some additional taxes and sent a message to tax cheats in some sectors that it is determined to deal with the problem.

Five years have passed since the Underground Economy Initiative was announced. We expected the Department to measure and report clearly the tax impact and other results of the Initiative’s activities. This information is important to make decisions about the future of the Initiative and to determine what strategies are the most effective in combatting the underground economy. We noted that the Department does not report on the full range of the Initiative activities and on the long-term effect they have on compliance.

The Department reported that its activities to combat the underground economy had a tax impact of $2.5 billion over five years; however, we note that this amount included the results of its regular ongoing enforcement programs.

In terms of its tax impact, we estimate that the Initiative’s audit activities to detect unreported income have resulted in less than $500 million of tax reassessments over five years. Of course, we all realize that the amounts eventually collected will be less than the initial assessments.

In implementing the Initiative, the Department narrowed its focus on audits of four sectors – construction, jewelry, hospitality and automotive – where it believed it would have the largest and most visible impact.

However, taxpayers with a high risk of unreported income exist in all sectors. In our view, a more strategic approach can be taken to improve the implementation of the Underground Economy Initiative.

It may be time to adjust the focus of audit activities from just the four targetted sectors to include taxpayers with the highest risk of unreported income in all sectors. This could, for example, ensure that those not reporting foreign source income would be appropriately targeted for audit.

It is important that those who do business with participants in the underground economy be made aware of the social inequities and costs arising from unpaid taxes. Our Report recommends that the Department, or the new Agency, increase its activities for public awareness of the social inequities and costs arising from unpaid taxes.

We also noted that there has been a recent decline of the Department’s efforts in community visits and consultations. This diminishes the role that facilitation and education activities play in combatting the underground economy.

Our Report also recommends that the Department collaborate with others to get more external sources of information to detect tax cheats and improve its techniques for audit targetting and file selection. It also signals that additional legislative opportunities exist to deter tax cheats.

The Committee may wish to seek assurance that the Agency will act on Revenue Canada’s commitment to implement the recommendations necessary to improve its fight against the underground economy and that it will regularly advise you of the Initiative’s results.

Enforcing tax laws is no easy task. It is not the Canada Customs and Revenue Agency against the rest of us. It is the Agency working for all of us. Tax enforcement requires the support of all Canadians. Your committee may wish to send a message to all Canadians that tax cheating is unacceptable – nobody wants to pay what someone else owes under our tax laws.

Mr. Chairman, that concludes my remarks. We would be pleased to answer questions.