September 3, 2020 – Tax auditors’ incentives to raise more tax revenues have been amplified by higher targets and added funding for the Canada Revenue Agency.
In “Assessing the Canada Revenue Agency: Evidence on Tax Auditors’ Incentives and Assessments,” authors Kenneth Klassen and Nick Pantaleo explore the pressure on the CRA to raise more tax revenues, as well as assess the efficiency of the audit process and the fairness of results.
“Careful attention to the design of CRA’s compliance reporting system and auditors’ incentives is crucial to producing better and fairer taxpayer outcomes,” says Klassen.
The authors note that incentives to increase assessments were amplified by recent funding for the CRA that carries an expectation that additional tax revenues of $5 will be collected for each $1 spent, a “return” that is much higher than in the past. As well, these additional tax revenues are explicitly linked to closing the “tax gap,” the CRA’s measure of how much tax revenue theoretically exists versus how much is actually paid voluntarily.
Practitioners express concerns over poor CRA audit-process quality. The duration of CRA audits, the very high proportion of reassessments that are issued in the final two months of its fiscal year, and the rate at which reassessments are eventually ruled in the taxpayer’s favour lend some evidence to these concerns.
“The role of the CRA in ensuring compliance of all Canadian taxpayers is important to the integrity of the tax system,” write the authors. “There are considerable challenges to determining the fair amount of tax to assess, particularly when taxpayers have an obvious incentive to plan their activities to pay less tax. CRA auditors, however, have incentives to increase their assessments, and show larger fiscal impacts that are not adjusted for subsequent reversals. We recommend adjustments for these reversals to offset the incentives.”
The report recommends calibrating the performance of CRA compliance activities to reduce emphasis on fiscal impact, a measure of revenues collected, and that fiscal impact be adjusted for final taxpayer assessment amounts, which does not occur at present. Finally, the CRA has developed a measure of overall compliance and confidence that taxes will voluntarily be paid called, “validated risk,” which can offset incentives arising from the emphasis on fiscal impact. This measure should be expanded and play a more prominent role in future assessments of compliance.
For more information contact: Kenneth J. Klassen, KPMG Professor of Taxation, the School of Accounting & Finance, University of Waterloo; Nick Pantaleo, FCPA, FCA, retired executive of Rogers Communications, former tax partner, PwC LLP; or David Blackwood, Communications Officer, C.D. Howe Institute, 416-873-6168 or dblackwood@cdhowe.org