What the media missed in the Auditor General’s CRA report
Canada Revenue Agency does not accurately measure its performance
TORONTO, February 27, 2019 – When the late Michael Ferguson, Canada’s Auditor General, released his report last year on the tax compliance efforts of the Canada Revenue Agency, the first part of the report garnered the most media attention. Ferguson examined whether the CRA consistently applied Canada’s tax laws during compliance activities like a CRA tax audit. Bottom line? The Auditor General gave the CRA a failing grade.
What I find more important, as a tax lawyer of more than 30 years who deals with the CRA every day, is what the Auditor General said about how the CRA measured, monitored and reported its performance to the federal government. This was Ferguson’s second finding, which was woefully unreported in the media — the CRA couldn’t accurately measure and therefore did not accurately report its performance.
The late Auditor General’s report not only confirmed my worst fears but clearly showed that dysfunctional behaviour by CRA employees adversely affects taxpayers. That behaviour is directly caused by management policies and review systems or, more precisely, the lack of them. In particular, the report stated that CRA:
1. Couldn’t clearly explain how it established annual revenue goals;
2. Closed most tax audits and assessed additional taxes by March 31st — surprise! — just in time to report its annual performance;
3. Overstated the revenue it generated by failing to account for taxes that were still under dispute and uncollectable or tax debts that were written off; and
4. Neglected to accurately track the relationship between the amount of budget spending it required to generate additional revenue.
Unsurprisingly to us Canadian tax lawyers and accountants, the CRA fell short on all accounts. It not only failed to consistently apply tax rules but also couldn’t accurately gauge its own performance. Its performance measures lead to behaviour that causes unnecessary stress and costs to Canadian taxpayers.
Points two and three are particularly outrageous in that they provide a positive incentive to tax auditors and appeals officers to close files and assess taxpayers for inflated amounts that are not in fact owing.
Furthermore, these CRA employees are being positively evaluated, and presumably promoted, based on this behaviour. After decades of total quality management (TQM), ISO 9000 standards and customer service obsessions, the CRA has remained immune to all of them.
At Rotfleisch & Samulovitch, we have an ongoing file where the CRA assessed our client for $23 million of purported casino gambling, unsupported by the reported income. We conducted an extensive analysis of the casino records and submitted a detailed rebuttal to the CRA with supporting schedules showing the flawed methodology and assumptions made by the auditor.
We followed up repeatedly asking for a response. Instead we received a reassessment ignoring our submissions but reducing the assessed amounts to $18 million with no explanation. We were forced to file a notice of objection.
So, this auditor “successfully” concluded his audit and raised $18 million for the government. Kudos to the auditor for a job well done! The fact that none of this amount is actually due and owing is apparently irrelevant — don’t bother the CRA with the facts. The fact that the taxpayer has an $18 million debt hanging over his head and now has to incur additional fees of a tax lawyer to dispute it is merely collateral damage.
These findings prompted the Auditor General to recommend that the CRA clearly document how it sets additional revenue targets, accurately measure the additional revenue generated from budgetary funding, and refine its performance indicators to report on actual collected tax revenues. The CRA responded by promising that, by March 2020, it will either implement the recommendation, review its procedures or create an action plan. That’s more than a year from now.
We’re not holding our breath. Canadians should demand a higher standard of service, professionalism and accountability, especially for a federal agency with such sweeping powers to wreak havoc in the lives of Canadians.
David J Rotfleisch, CPA, CA, JD is the founding tax lawyer of Rotfleisch & Samulovitch P.C., a Toronto-based boutique tax law firm. He appears regularly in print, radio and TV. With over 30 years of experience as both a lawyer and chartered professional accountant, he has helped start-up businesses, resident and non-resident business owners and corporations with their tax planning, with will and estate planning, voluntary disclosures and tax dispute resolution including tax litigation. Visit Taxpage.com and contact David through firstname.lastname@example.org.