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Accountant's Report
on the results of applying specified auditing procedures performed in connection with the Canada Customs and Revenue Agency’s (CCRA) assertion that there are unlikely to be other provincial income tax reporting omissions similar to the omission of provincial capital gains refunds earned by mutual fund trusts
To the Minister of Finance of Canada
Consistent with my engagement letter to the Deputy Minister of Finance of Canada, I have performed the specified procedures set out in the Annex to this report in connection with the Canada Customs and Revenue Agency’s assertion that there are unlikely to be other provincial (or territorial) income tax reporting omissions similar to the omission of provincial capital gains refunds earned by mutual fund trusts.
In my engagement letter I indicated that I would help determine whether there are other CCRA accounting practices that have resulted or could result in material errors / omissions in the provincial assessed amounts included in the Federal / Provincial Tax Sharing Statements. The specified auditing procedures set out in the Annex to this report, on their own, are not sufficient to support the issuance of an audit opinion. These specified procedures will help to otherwise reaffirm the reliability of previously issued audit opinions on the Statement of Income and Capital Taxes Payable to the Provinces and Territories, to the extent that I am provided with all the necessary information to complete these procedures, and they do not reveal that other material errors / omissions have occurred.
To test whether material errors could occur (in the future) would require extensive audit procedures related to, among other things, the design, implementation and continued functioning of adequate internal control systems. Financial reporting at CCRA involves a large number of systems and processes, some of which have previously been the subject of internal control reviews by my office, others are currently the subject of such reviews, while others are planned for in the future. In the interest of timely reporting, I have not, as part of this engagement, performed specified procedures with respect to the design, implementation and continued functioning of the internal control systems related to whether material errors could occur in the future. However, where internal control issues have been identified as part of these specified procedures, these issues will be reported to CCRA in a separate letter of recommendations to management.
The specified procedures to test whether other material errors / omissions have occurred involve the following three (3) tasks:
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1) Test whether significant provincial line items in tax returns,
forms and schedules are, in design and in practice, completely and
accurately posted to general ledger accounts classified as provincial,
2) Test whether provincial classified general ledger accounts are completely and accurately accumulated in each of the three key documents used in reporting to the provinces; 1) the Federal / Provincial Tax Sharing Statements prepared by CCRA, 2) the Final Determination of Payments prepared by the Department of Finance, and 3) the Statement of Income and Capital Taxes Payable to the Provinces and Territories prepared by the Department of Finance and previously tested as part of our tax collection agreement audit work, and
3) Test “high risk” and / or “high value” general ledger accounts not identified as provincial to determine whether provincial amounts have been incorrectly posted to general ledger accounts not classified as provincial.
As a result of applying the specified procedures as set out in the Annex to this report, with respect to Task 1) “Test whether significant provincial line items in tax returns, forms and schedules are, in design and in practice, completely and accurately posted to general ledger accounts classified as provincial”, I:
1) Found no exceptions when performing Procedures:
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a) i) to iv), a) vi), a) viii), b) i) (1), b) i) (2), b) i) (3) (a), b) i)
(4) to (8).
2) Selected 320 sample items when performing Procedure b) i) (2).
3) Found the following exceptions:
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a) When performing Procedure a) v), detected one instance of a
provincial tax credit general ledger account not being set up on a
timely basis. This instance did not result in any error in
provincial reporting.
b) When performing Procedure a) vii) detected:
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- Three Manitoba provincial income tax line items not directly
posted to the appropriate general ledger accounts. CCRA has
informed me that “Unique aspects of the Manitoba tax-on-income
legislation resulted in a design for the 2000 personal income tax
form that hindered the efficient input of data related to certain
line items into the CCRA systems. A temporary approach was
established for transferring data from the form to the general
ledger, but it meant that a subsequent adjustment was needed.”
This classification adjustment in the amount of $96 million was
made to the 2000 tax year. CCRA has identified misclassification
concerns with certain amounts included in and / or excluded from
this adjustment. CCRA expects to address these concerns by August 31, 2002. While any required further adjustment would have no
overall impact on Manitoba net income tax revenues, it would
impact on the classification of certain Manitoba amounts
(increases some amounts which are offset by similar decreases in
other amounts) previously included in the Federal / Provincial Tax
Sharing Statements. However, if a further classification
adjustment is deemed necessary, I will require CCRA to make this
adjustment prior to the finalization of the Statement of Income
and Capital Taxes Payable to the Provinces and Territories for the
2000 and prior Tax Years, and my opinion thereon.
- One instance of two different provincial tax credits for the same province being mapped to a single general ledger account. This instance did not result in any error in provincial reporting.
- One instance of the “recapture” portion of a provincial tax credit being mapped to an incorrect provincial tax credit general ledger account (for the same province). This instance did not result in any error in provincial reporting.
c) When performing Procedure b) i) (3) (b) detected:
- One instance of a provincial general ledger account name not fully reflecting its actual contents. The account was entitled “Tax Levied Small Business Corporation”, but in fact included provincial tax levied for all corporations. This instance did not result in any error in provincial reporting.
- One instance where a T3 (trust) keying error resulted in an $18 overstatement of provincial individual surtax and an equivalent understatement of federal individual surtax.
As a result of applying the specified procedures as set out in the Annex to this report, with respect to Task 2) “Test whether provincial classified general ledger accounts are completely and accurately accumulated in each of the three key documents used in reporting to the provinces; 1) the Federal / Provincial Tax Sharing Statements prepared by CCRA, 2) the Final Determination of Payments prepared by the Department of Finance, and 3) the Statement of Income and Capital Taxes Payable to the Provinces and Territories prepared by the Department of Finance and previously tested as part of our tax collection agreement audit work”, I:
1) Found no exceptions when performing Procedures:
a) i) to v), a) viii), a) x), b) i), b) ii).
2) Found the following exceptions:
a) When performing Procedure a) vi), we expected to find that a general ledger would be the source for all amounts reported in the Federal / Provincial Tax Sharing Statements. This was not always the case as noted below. However, these exceptions did not result in any errors in provincial reporting with the exception of ii) below:
i) the adjustment required to correct the Manitoba tax issue (described in Task 1) 3) b) above), was recorded directly in the Federal / Provincial Tax Sharing Statements as at December 31, 2001, and has not yet been recorded in either the Tax General Ledger or the Revenue Ledger.
ii) there was for one general ledger account, a difference of $500 between the amount shown on the “Consolidated Trial Balance” and the equivalent amount shown in the Federal / Provincial Tax Sharing Statements.
iii) the amounts recorded on Statement 9 of the Federal / Provincial Tax Sharing Statements as at December 31, 2001, relating to provincial capital gains refunds for mutual fund trusts, did not come from general ledger accounts but from reports produced by the Automated Trust System (T3 assessment system). This reflects the fact that general ledger accounts for such capital gains refunds did not exist until recently.
iv) the amounts recorded on Table 6 of the Federal / Provincial Tax Sharing Statements as at December 31, 2001, relating to the breakdown by province of capital gains refunds for mutual fund corporations, did not come from general ledger accounts but from reports produced by the Cortax System (T2 assessment system). This reflects the fact that a provincial breakdown of capital gains refunds for mutual fund corporations is not available in the general ledger as only a single general ledger account exists.
b) When performing Procedure a) vii), noted that two accounts relating to provincial capital taxes, which were included in the Federal / Provincial Tax Sharing Statements, were not included in the Department of Finance’s Final Determination of Payments Tables. This exception did not result in any error in provincial reporting, since when performing Procedure a) ix), it was noted that these same two accounts not included in the Final Determination of Payments Tables were included in the Statement of Income and Capital Taxes Payable to the Provinces and Territories.
c) When performing Procedure b) iii), noted that CCRA has received, to date, confirmations concerning the completeness of provincial income tax general ledger accounts from 12 provinces and territories. Of these; 9 are in agreement, 1 has identified one provincial tax general ledger account for which no such provincial tax levy currently exists; 1 states that it is not in agreement but has not provided any supporting details, and 1 has indicated that it can not reply at this time. With respect to the latter two (2) responses, I am unable to determine the provincial reporting implications, if any, of these responses.
As a result of applying the specified procedures as set out in the Annex to this report, with respect to Task 3) “Test “high risk” and / or “high value” general ledger accounts not identified as provincial to determine whether provincial amounts have been incorrectly posted to general ledger accounts not classified as provincial”, I:
1) Found no exceptions when performing Procedures:
a) i) to vi), a) vii (1), a) vii) (2), a) viii), b) i) to iii), c) i) (1) to (3), c) i) (5), c) ii) (1), c) ii) (2), d) ii) to iv).
2) Identified 146 “high risk” and / or “high value” Tax General Ledger accounts using the “risk ranking criteria” outlined in Procedure a) iii).
3) Selected, from the 146 “high risk” and / or “high value” accounts noted above, 177 sample items at the individual transaction level when performing Procedures a) v) and a) vii).
4) Identified 29 “high risk” and / or “high value” Revenue Ledger accounts using the “risk ranking criteria” outlined in Procedure a) iii).
5) Found the following exceptions:
a) When performing Procedure a) vii) (3), noted one instance where a keying error resulted in a $900 understatement of provincial tax for one province and an overstatement of the provincial tax for all other provinces of an equivalent total amount.
b) When performing Procedure b) iv), noted one instance where a keying error resulted in a $963 understatement of a provincial tax credit.
c) When performing Procedure c) i) (4), noted that, of the 32 suspense (temporary holding) and clearing (used to control passage of information between computer systems) accounts reviewed within the Tax General Ledger, 16 were still uncleared after 90 days after year-end (December 31, 2001). Also, all 16 uncleared accounts were not on the “Over 90 Days” lists received from the tax centres. I understand that this list is currently used to apprise CCRA headquarters of “unusual” situations requiring headquarters follow up. Eleven (11) of these 16 accounts were subsequently cleared. I am unable to determine the provincial reporting implications, if any, of the five accounts which have uncleared amounts as follows; $1.6 million, $2.2 million, $14 million, $39 million, and $56 million. I have been informed by CCRA that these uncleared amounts have accumulated over the past few years.
d) When performing Procedure c) ii) (3) noted that:
- CCRA did not provide a Revenue Ledger account reconciliation as at December 31, 2001 for one $289 million suspense account requested. This account has only been operational within the Revenue Ledger since November 2000. CCRA has informed me that, given the nature of this suspense account, the typical entries made to this account do not normally impact provincial revenues. However, I will require CCRA to complete this reconciliation, and determine the provincial reporting implications, if any, prior to the finalization of the Statement of Income and Capital Taxes Payable to the Provinces and Territories for the 2000 and prior Tax Years, and my opinion thereon. CCRA has informed me that they will complete this reconciliation in the near future.
- for one suspense account requested, CCRA’s reconciliation as at December 31, 2001 indicated $165 million of uncleared entries. Investigation by CCRA has revealed that these entries, in total, overstated provincial corporate assessed taxes by $37 million as compared to amounts previously set forth in the December 31, 2001 Federal / Provincial Tax Sharing Statements, and the December 31, 2001 Final Determination of Payments. The effect on these statements of these uncleared entries is an overstatement of Saskatchewan provincial corporate assessed taxes of $31 million, an overstatement of Nova Scotia provincial corporate assessed taxes of $3 million, with five (5) other provinces impacted by amounts of less than $1 million each. I will require CCRA to clear these reconciling items to correct these provincial reporting errors prior to the finalization of the Statement of Income and Capital Taxes Payable to the Provinces and Territories for the 2000 and prior Tax Years, and my opinion thereon.
e) When performing Procedure d) i), CCRA reported that due to the highly manual nature of the exercise, a complete and accurate listing of all Tax General Ledger accounts added or deleted for the 1993 and 1994 tax years, could not be prepared on a timely basis. I am unable to determine the provincial reporting implications, if any, of this situation.
These specified procedures do not, on their own, constitute an audit of and therefore I express no opinion on the Canada Customs and Revenue Agency’s assertion that there are unlikely to be other provincial income tax reporting omissions similar to the omission of provincial capital gains refunds earned by mutual fund trusts.
This report has been prepared solely for use in connection with an evaluation of the omission of provincial capital gains refunds earned by mutual fund trusts from the previously issued Statements of Income and Capital Taxes Payable to the Provinces and Territories.
Sheila Fraser, FCA
Auditor General of Canada
Ottawa, Canada
July 12, 2002
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| Last Updated: 2003-01-14 |
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