Excise Act Review: 6
- Table of Contents - Previous - Next -

Part VI
Proposal for a Revised Excise Framework Revenue Canada Administration

Parts IV and V of this paper set out the proposal for a revised excise framework in terms of imposition and control features, and administration and compliance. The broad structural changes that are proposed in these areas will be implemented by new legislation and delivered through the administration functions of Revenue Canada.

The proposal for a revised excise framework provides new opportunities for administrative efficiencies on the part of both industry and government. In fact, the administrative interaction between industry and government is critical to the realization and success of the new excise system. In the following sections, Revenue Canada's approach to administering the new excise system will be outlined.

Background

For some years, Revenue Canada has found it increasingly difficult to administer the archaic provisions of the Excise Act, and has agreed with industry's assessment that the legislation needs to be revised. Over this time, Revenue Canada has implemented such administrative and regulatory reforms as could be carried out under the authority of the existing legislation. Recognizing that additional reforms and a new approach to administration require wholesale legislative change, Revenue Canada has committed resources to the development of a new excise structure in conjunction with the Department of Finance and industry associations.

The importance Revenue Canada attaches to the development of a new excise framework is reflected in its current Corporate Plan, which sets out strategic goals for the fiscal years 1995-96 through 1997-98, as well as a clear strategy and key initiatives being undertaken to achieve each of them. One of the key initiatives highlighted in the Corporate Plan is the completion of the excise review.

The review is an important vehicle for change because it will deliver reforms on a number of fronts, each of which feeds into broader Revenue Canada initiatives. Examples of such initiatives include the integrated collections strategy, the comprehensive service quality strategy and the comprehensive compliance strategy.

Deficiencies in the Legislation
From an Administrative Perspective

The overall philosophy behind the Excise Act is one of rigorous control and strict adherence to a set of prescribed rules to ensure that revenue to the Crown is maximized. These philosophical underpinnings are illustrated by the following references from the current law:

• No erasure shall be made in any books required to be kept ... and any obliterating of words or figures ... other than by ruling through them with ink in such a manner as not to render the words or figures so ruled out incapable of being read, shall be deemed to be an erasure (section 34);
• ...when two or more methods for determining quantities or the amount of duty to be paid are provided for, the method that yields the largest quantity or the greatest amount of duty shall be the standard (section 42); and
• Alterations may not be made to premises without written notice served on the collector at least one week before they are commenced (section 26).

This supervisory structure is at odds with current accounting and collection practices applied across other taxes, where the accepted norm is to provide for self-assessment by the taxpayer, with periodic audit by the government revenue authority including assessment powers and collection tools.

Moreover, unlike other federal tax statutes, the Excise Act provides no formal appeals process for taxpayers to make representations and seek redress against administrative actions or decisions of Revenue Canada. While the adoption of flexible regulatory provisions and administrative arrangements agreed to by Revenue Canada and taxpayers have helped extend the life of the act, there is no denying that the legislation is fundamentally out of step with a modern tax administration.

Revenue Canada's New
Approach to Administration

The rigid structure of the Excise Act has become an impediment to both competitive operating structures for industry, and the types of reforms being carried out under Revenue Canada's administrative consolidation, such as the implementation of an integrated accounting system.

The savings that should accrue to taxpayers and government from the recent consolidation of the two previously separate Departments of National Revenue (Customs & Excise and Taxation) cannot be fully realized without legislative amendments to remove structural rigidities and standardize such things as collections provisions, and accounting and remitting periods, across various taxes.

The proposal for a revised excise framework will allow Revenue Canada the opportunity to implement a modern administrative approach based on self-assessment by the taxpayer and after-the-fact verification through the audit process. The following sections provide an outline of how this new approach will be implemented across key areas.

Licensing

Producers

The current law requires a separate application and licence for each premise. Under the new structure, it is the person rather than the physical premises who will be licensed. A single excise licence will allow a person to operate from a number of premises providing Revenue Canada is notified before a new location is put into operation.

In addition, there will no longer be separate licences for each category of product -- one generic producer's licence will allow the licensee to produce any excisable product. The person applying for a licence must specify which product(s) are intended to be produced and notify Revenue Canada when they intend to produce a new category of product.

This approach to licensing the person is consistent with Revenue Canada's initiative to implement the single "business number", which will provide a unique client identifier to a business and replace the various account numbers Revenue Canada currently assigns to clients for corporate income tax, GST, payroll deductions and so on. Assignment of a unique business number to each client will facilitate fast and efficient, single-window service to taxpayers.

The new structure anticipates fewer requirements and a more streamlined process for approval and issuance of licences. The requirement for guarantee bonds will be eliminated as will the onerous and somewhat arbitrary requirements for pre-licensing submission of information. The Minister will retain the power to refuse or revoke a licence but the criteria for exercising that power will be formalized. Applicants will be screened and may be refused a licence, for example, on the basis of prior criminal activity, including convictions for offences under the new legislation or under related legislation. A licence may be revoked on similar grounds, as well as for failure to comply with the terms, conditions and obligations of the licence.

Shifting the emphasis away from screening requirements for prospective licensees will allow Revenue Canada to direct resources and attention toward activities that will ensure maintenance of good compliance records by existing licensees. This more facilitative approach at the front end will be balanced by the availability of collection tools mentioned earlier, and an approach to audit and compliance that is based on the risk profile and performance record of licensees.

Registrants

Certain features of the proposed excise framework will extend more flexibility to excise licensees to organize their operations and arrange their business affairs. An example is the proposal to create an "excise registrant" who may possess and transport bulk goods which it does not own and on which, by definition, excise duty has not been paid.

Approval of excise registrants will involve a simple registration process, given that excise registrants will not be taxpayers and that liability for excise duty will remain with the excise licensee who owns the bulk goods. There will, however, be sanctions imposed on excise registrants who fail to comply with the record-keeping and documentation requirements of the new legislation. These requirements, coupled with restrictions over ownership and possession of bulk goods, are critical to maintaining protection over revenue in the new excise duty framework.

Warehouses

Other examples of the flexibility in the proposed excise framework may be found in the warehousing of excisable products. Licensing approval and operating requirements will be simplified and streamlined to facilitate implementation of these initiatives.

Currently, there are two types of warehouses provided for under separate legislative and administrative authority -- customs bonded warehouses under the Customs Tariff for imported goods, and excise bonding warehouses under the Excise Act for domestically produced goods.

These warehouses will be replaced by a single "excise warehouse" for alcohol and tobacco products that may be used to store both domestic and imported packaged goods. Storage on a duty-deferred basis will be available for packaged wine and spirits, but not packaged beer or tobacco products, where the goods are intended for the domestic market. All packaged excisable goods may be stored on a duty-deferred basis in an excise warehouse where the goods are for duty-free sale or export.

A warehouse operator will be required to secure only one excise warehouse licence, regardless of the number of separate physical facilities owned or the classes of goods (spirits, beer, wine or tobacco) being stored. The excise warehouse licence holder will, however, be required to notify Revenue Canada when a new warehouse location is established or a new category of product is to be stored in a given warehouse.

The excise warehouse licensee will not be required to post security to guarantee payment of the duties on products being stored, but will be held liable for outstanding duty on any unaccountable losses of those products, including theft. This new administrative approach will eliminate the need for physical controls and security requirements for warehouses, most notably those contained in the Excise Warehousing Regulations.

The new legislation will establish basic requirements for obtaining a licence. Where an application is rejected, the reasons will be made clear to the applicant and the applicant will have an opportunity to respond to the decision. Similarly, the grounds for suspension or cancellation of a licence will be formalized, and a licensee will have the right to respond before such action is taken.

Eliminating alcohol and tobacco products from customs bonded warehouses will allow these facilities, which have recently been re-engineered under the federal government's duty-deferral initiative to facilitate value-added activities and economic development opportunities for Canadian business, to operate without restrictions designed specifically for alcohol and tobacco products.

At the same time, Revenue Canada's control over alcohol and tobacco products will be enhanced because of greater certainty over who is holding and distributing duty-free products through excise warehouses. The only added administrative burden will be a requirement for an additional licence for a small number of customs bonded warehouse operators who deal in both excisable and non-excisable goods (e.g., ships' chandlers and airlines).

Manufacturers

Streamlining will also take place in the area of licensed manufacturing or use of alcohol for non-beverage purposes. Under current legislation, licensed manufacturers must obtain a separate licence for each class of product and must maintain separate inventories of spirits, as well as separate books and records. Under the proposal for a revised excise framework these requirements will be removed and only one licence will be required.

In addition, Revenue Canada will simplify its formula-approval process in consultation with the distillers and licensed manufacturers who are authorized to produce and use alcohol for non-beverage purposes. Revenue Canada will establish an industry working group to recommend changes to the existing approval process, with particular emphasis on the approval criteria to be applied. The new process should provide licensed manufacturers with improved service consistent with continued revenue protection and safeguards against diversion of alcohol to illegal beverage applications.

Accounting Requirements and Returns

Under the proposal for a revised excise framework, restrictions on the location and security of premises of excise licensees are being abolished, and more flexibility is being extended to licensees to arrange for production, storage and distribution of their goods.

Because the integrity of the new tax system depends on after-the-fact verification of the activities of excise licensees and registrants, strict legal requirements for record-keeping will be established and enforced.

The current requirements for books and records will be reviewed in consultation with taxpayers, to ensure that the new requirements are reasonable, relevant and, to the greatest extent possible, consistent with the records and reports that are already being generated for internal control purposes. The emphasis for these new requirements will be on content rather than format.

A return will be required from every taxpayer for each (monthly) accounting period. There may also be requirements, periodically, for "information returns" regarding the production, importation or movement of excisable goods. Given the need to monitor the production and movement of high-value goods on the basis of audit activity, up-to-date information on their status and disposition will be critical.

Audits

Under the current excise duty program, the audit approach used is consistent with the overall philosophy of the legislation mentioned earlier -- strict control and maximization of revenue. This is accomplished by an audit and surveillance program that constitutes across-the-board coverage of a licensee's production and disposition of goods over a relatively short cycle by normal audit standards.

A surveillance is in essence a mini-audit that ensures more frequent physical presence of duty officers in licensed premises. The surveillance program was initiated as a transitional measure when on-site supervision was phased out some years ago. The theory is that early detection of errors will help reduce any ultimate assessment against the taxpayer.

In practice, the current program has been a source of frustration for some taxpayers because it represents an "audit for assessment" rather than an "audit for compliance" mentality and approach. It is often viewed as setting an overly rigid, even punitive, standard in relation to any reasonable audit objective of satisfying that a taxpayer is in compliance with standard norms and expectations regarding self-assessment.

For Revenue Canada as well, this approach may not represent the most cost-effective deployment of resources. Audit resources are spread thinly given this broad coverage and, despite this exclusive reliance on real-time or on-site auditing, there are no material assessments from most of these audits and surveillances.

Revenue Canada's approach under the new proposals will be based on audit for compliance and audits will be results driven. Under this philosophy, audit activity will be concentrated in areas that represent the highest risk to revenue. This will involve stratifying clients for audits according to risk-based criteria, including previous experience for new licensees, established compliance performance for existing licensees, and the amount of revenue potentially at risk. The resulting risk profiles will drive the audit program and determine where resources will be concentrated.

The elimination of redundant and non-revenue-related legislative requirements under the revised excise framework will allow audit activity to focus exclusively on material issues. In addition, audit activity will need to be strengthened and expanded into new areas where the revised excise framework allows new initiatives, such as storage of duty-free goods in excise warehouses and the creation of new participants such as excise registrants.

The audit approach, as well as the skills and training of responsible audit staff, must ensure that audits will be delivered in a manner that is appropriate and convenient to the circumstances of the individual taxpayer. Some taxpayers are large firms which operate sophisticated, automated accounting systems for their own internal accountability. In these cases, audit staff will generally conduct systems-based audits using statistical sampling techniques. Other taxpayers are smaller businesses that continue to rely on manual, paper-based systems. In those cases, more traditional audit approaches will continue to be the norm.

Assessments

An integral part of any modern taxation structure based on self-assessment and after-the-fact verification is the ability of the taxation authority to assess for amounts owing where it is determined, following an audit process, that the taxpayer has not properly accounted for the tax liability.

Under the proposal for a revised excise framework, Revenue Canada will have a broad assessment authority. Given that excise duty will be imposed during the production process and payable at the time of packaging, the fundamental reconciliation will be to determine whether the quantity of goods actually packaged exceeds that reported to have been packaged.

The assessment authority will allow assessments based on the difference between what was reported to have been packaged, and what was produced and should have been packaged. These assessments would be similar to the approach used for "net worth" assessments under the Income Tax Act where the taxpayer's books and records are not reliable or do not exist.

Offences

Under the revised excise framework, only excise licensees and excise registrants may possess bulk goods. This new control structure allows for the creation of an offence for simple possession of bulk goods, including wine, by unauthorized persons. These persons will be liable for penalties as well as forfeiture and seizure of the goods.

This control structure for bulk goods, the elimination of the small manufacturer's exemption from licensing and payment of excise tax, and the imposition of excise duty at packaging, will assist federal and provincial law enforcement agencies in their efforts to combat the growing problem of smuggling and illegal production of wine.

Until now, the delay in imposing excise tax until delivery or sale by the vintner, and the small manufacturer's exemption, made it difficult to affix liability for tax and provide evidence sufficient to convict for alleged illicit activities. The new offence provisions will be simple and certain and evidence sufficient to convict will be easier to obtain. In fact, these provisions will parallel the existing possession offences for tobacco.

A common offence base and evidentiary requirements similar to those applied to other excisable goods, should ensure that the impact of the federal government's anti-smuggling initiatives will extend to include smuggled and illegally diverted wine. Stronger enforcement will benefit legitimate wine producers whose markets have been undercut by the criminal activities of others.

Collections

The bonding provisions of the Excise Act will be abolished, except for non-resident taxpayers who elect to become licensed, and replaced with more modern collections provisions already contained in the Income Tax Act and the Excise Tax Act.

These new provisions will provide collections officers with the ability to handle outstanding accounts in an effective manner, consistent with the other taxes that Revenue Canada administers. It will also ensure fair and equitable treatment of taxpayers under different taxing statutes.

Excise duty in arrears will be subject to the same actions as arrears of other taxes. For example, Revenue Canada will be able to setoff arrears of duty against refunds or rebates of other taxes that would otherwise become due to the taxpayer. Similarly, when a taxpayer fails to meet an obligation to pay excise duty in arrears, garnishment action will be possible against amounts owed to the taxpayer by other persons.

Given these collections tools and an integrated departmental approach to this function, it is anticipated that the new collections program will be delivered in a more cost effective and less intrusive manner than has been possible with the administration of guarantee bonds, which impose transactions costs on all participants.

Appeals

The proposal for a revised excise framework includes a legislative appeals process. In addition, this formal appeal process will be complemented by an informal administrative process within Revenue Canada.

Informal review will be available to any of Revenue Canada's clients at an early stage regarding any matter in dispute, whether monetary or administrative. Such informal review will be less structured than the formal, statutory-based process. The key element will be the client's access to an intermediary within Revenue Canada who is structurally independent from the group making the decision in dispute.

This will provide an opportunity for a second opinion on the matter, with an earlier and less expensive resolution than under the formal appeal system. At the same time, it will not preclude eventual recourse to the formal system if the matter cannot be resolved satisfactorily.

- Table of Contents - Previous - Next -