Audit at a Glance—Chapter 3—Aggressive Tax Planning

Audit at a Glance

Chapter 3—Aggressive Tax Planning

What we examined (see paragraph 3.5 and Focus of the audit)

Our audit focused on how the Canada Revenue Agency manages the Aggressive Tax Planning (ATP) program and how the Department of Finance Canada responds to requests for legislative changes to address the ATP issues that the Agency identifies.

There are many different ways that a taxpayer can structure an aggressive tax plan. For the purposes of this audit, we have selected four examples from the numerous types of plans of which the Agency is aware.

What we found

The Canada Revenue Agency has a number of ways to detect aggressive tax plans (see paragraphs 3.14-3.17)

The Canada Revenue Agency has not fully evaluated whether it is able to detect high-risk large business files (see paragraphs 3.18-3.21)

This finding is important because without fully testing the effectiveness of its new risk assessment model, the Agency cannot be certain that high-risk cases are in fact being identified and selected for follow-up.

Recommendation. In order for the Canada Revenue Agency to obtain assurance that its aggressive tax planning risk assessment tool properly identifies the high-risk files, it should complete the testing of the National Risk Assessment Model’s effectiveness.

The Canada Revenue Agency has had success in correcting non-compliance (see paragraphs 3.22-3.28)

This finding is important because since 1988, 54 General Anti-Avoidance Rule (GAAR) cases have been litigated in the courts, and the Minister of National Revenue has been successful in 28 of those cases; that is, the GAAR applied to the plans, and the tax benefits obtained were denied. The Agency regards a lost case as a learning experience, since it clarifies how the courts view GAAR application to a particular aggressive tax plan.

A formal learning path for auditors is in place, but the Canada Revenue Agency does not track the formal training of auditors working on aggressive tax planning (see paragraphs 3.29-3.33)

This finding is important because to do good-quality audit work, it is important for ATP auditors to have a solid understanding of legislation and to be aware of which ATP plans are being used. Acquiring such knowledge through formal training, mentoring, information sharing, and internal communication is essential for ATP auditors so that they can detect and properly assess potential ATP transactions.

Recommendation. The Canada Revenue Agency should monitor the progress of aggressive tax planning auditors against their learning path and use that information to identify gaps and provide training where needed.

The Canada Revenue Agency applies penalties to third parties (see paragraphs 3.34-3.37)

This finding is important because, of the 48 cases in which third-party penalties were approved, the total value of penalties assessed was $63.3 million (the median penalty was approximately $440,000). Their use probably has had some impact on the behaviour of promoters and tax preparers.

There are gaps in how the Canada Revenue Agency measures the performance of its Aggressive Tax Planning program (see paragraphs 3.38-3.50)

This finding is important because having three performance measures that provide indicators of the Agency’s use of resources and the outcome and quality of audit efforts provides good feedback on the Aggressive Tax Planning program’s success. While tax earned by audit is a useful measure of the immediate results achieved by audit activities, it is not an adequate measure of the ATP program’s long-term success. We found there could be some improvements in the interpretation of the results of these performance measures.

Recommendation. The Canada Revenue Agency should re-evaluate its performance measures for its Aggressive Tax Planning program and develop measures and indicators to better reflect program success.

The Canada Revenue Agency submits aggressive tax planning legislation issues to the Department of Finance Canada for resolution (see paragraphs 3.51-3.55)

This finding is important because the Agency is responsible for protecting Canada’s revenue base, in part by identifying aggressive tax plans requiring possible legislative changes.

The Department of Finance Canada makes legislative proposals, but we cannot conclude whether it follows its processes to provide timely analysis of aggressive tax planning issues (see paragraphs 3.56-3.59)

We have not been able to examine how specific requests from the Canada Revenue Agency for legislative changes to block aggressive tax plans were analyzed by Department staff. The Department determined that this information constitutes a Cabinet confidence outside the scope of the Auditor General’s access entitlements under existing orders-in-council. For that reason, the Department did not grant access to the requested information. Therefore, we cannot determine whether the Department of Finance Canada has followed its processes in providing timely analysis of requests from the Agency. We were able to see that most of the requests from the Agency in the three years under audit were addressed by the 2011–2013 federal budgets.

Response

The Canada Revenue Agency has agreed with our recommendations, and has responded (see List of recommendations).

Why this audit is important

The Canada Revenue Agency’s mission is to administer tax, benefits, and related programs and to ensure taxpayer compliance with the Income Tax Act, the Excise Tax Act, and related legislation, on behalf of governments across Canada. As Canada’s tax administrator, in addition to protecting Canada’s tax revenue base, the Agency’s primary goal is compliance: ensuring that taxpayers meet their compliance obligations.

Many taxpayers, including individuals, corporations and trusts, use tax planning to organize their affairs to reduce or eliminate the amount of tax owing. Canadian courts have held that, in general, taxpayers have the right to enter into transactions that will minimize their tax liability. However, that right has been restricted in Canada by statutory anti-avoidance rules, including the General Anti-Avoidance Rule (GAAR). The GAAR may apply to tax plans that are considered aggressive, which the Agency defines as arrangements that push the limits of acceptable tax planning. In its corporate risk profile, the Agency has identified aggressive tax planning as one of the highest risks to its mandate of ensuring that taxpayers meet their compliance obligations.

Details of the audit