New Approaches to Small and Medium Enterprise Compliance

Fraser Valley Chartered Professional Accountants AssociationNovember 2014

Non-traditional Approaches to Addressing Non-compliance

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Audits and “intensive” methods for addressing non-compliance not always the best route.

Non-traditional approaches and a suite of options more effective in combatting non-compliance in the SME sector.

The CRA’s new, multi-dimensional approach:• Make compliance easier for those who want to comply

• Reduce tax-related errors made by small and medium enterprises (SMEs)

• Change behaviour of SMEs who may consider not complying

• Make non-compliance more difficult for those who choose not to comply.

Initiatives

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• The Liaison Officer Initiative

• The Industry Campaign Approach

• The proposed Registration of Tax Preparers Program

• The Letter Writing Campaign

• Combatting the Underground Economy

Liaison Officer Initiative

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The CRA is committed to helping small and medium-sized businesses comply voluntarily with Canada’s tax laws.

The Liaison Officer Initiative provides information and in-person support to businesses at key points in their business cycle in order to help them navigate the tax system.

Currently piloting three activities:• Small Business Support Visits

• Books and Records Reviews

• Compliance Support Arrangements

Liaison Officer Initiative

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Ontario Pilot Project – Launched March 2014• Location: Toronto

• Industry Sector: Management, Scientific and Technical Consulting Services

Quebec Pilot Project – Launched March 2014• Location: Montreal, Montérégie, Laval

• Industry Sector: Offices of health practitioners

Pacific Pilot Project – Launched October 2014• Location: Vancouver, Fraser Valley and North

• Industry Sector: Lessors of Real Estate

Atlantic Pilot Project – Launched October 2014• Location: Halifax, Charlottetown, Moncton and Saint John

• Industry Sector: Professional, Scientific and Technical Services

Prairie Pilot Project – Launching November 2014• Location: Edmonton, Saskatoon, Regina, Winnipeg

• Industry Sector: Services to Buildings and Dwellings

Feedback – as of October 6, 2014 Total number of respondents - 231

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QuestionStrongly Agree

Somewhat Agree

Percentage

The Liaison Officer was clear about the purpose of the visit to your place of business

182 39 96%

The Liaison Officer was able to answer your questions. 173 47 95%

The visit assisted you to better understand and clarify your tax matters.

118 84 87%

This approach would be useful to other businesses. 149 62 91%

It was easy to access the e-services and web links provided by the Liaison Officer.

125 66 83%

Industry Campaign Approach

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The CRA’s Industry Campaign Approach provides information and education to help businesses within a specific industry sector understand their tax rights and obligations, particularly at early stages of the business development process.

Enhancing the CRA’s relationship and partnering with Industry Associations is a key element of this approach.

Range of communications methods employed to make sure businesses receive the support they need to ‘get it right from the start’.

The first pilot focuses on the support services to the mining, oil, and gas extraction sector.

Approximately 19,000 small and medium enterprises in this sector.

Letters will be sent to new businesses (1,300) and to late filers (190) to help them avoid common compliance problems.

Partnership with industry associations to reinforce compliance messages

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Industry Campaign Approach

Proposed Registration of Tax Preparers Program

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The proposed RTPP would allow the CRA to link each tax return to the individual tax preparer and business they work for.

The CRA could identify those who are preparing non-compliant tax returns and work with them, providing focused information and support.

About 70% of individuals and small businesses use tax preparers to file their taxes.

The RTPP will benefit both tax preparers and taxpayers by helping them to ‘get it right from the start’, thereby avoiding costly and time-consuming interventions from the CRA after-the-fact.

Proposed Registration of Tax Preparers Program

On January 17, 2014, the Minister of National Revenue launched a national consultation on the proposed Registration of Tax Preparers Program (RTPP).

Over the past months, the CRA hosted discussions on the proposed RTPP with taxpayers, tax preparers and organizations representing tax preparers.

On September 2, 2014, the CRA posted “What we Heard: A report on our public consultation for the proposed Registration of Tax Preparers Program” at www.cra.gc.ca/rtpp.

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Letter Writing Campaign

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The Letter Writing Campaign promotes voluntary compliance through a combination of education and deterrence.

Letters sent to to individuals in selected activity groups where taxpayers are at risk of misunderstanding their tax obligations.

There are two types of letters:• Educational

• Intent to Audit

Taxpayers are encouraged to self correct if a reporting error has been made.

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Combatting the Underground Economy

The CRA dedicates a significant amount of resources to combating the underground economy, particularly in sectors of the economy where cash transactions are common.

The CRA works with the provinces, territories, and other federal government departments and agencies to better identify those participating in the underground economy.

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Combatting the UE

Outreach Education

Communication Compliance Actions

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Detection Tools

The CRA has access to a variety of tools to detect those who do not report all of their income: leads from taxpayers information-sharing agreements spot visits by auditors information obtained from third party reporting

systems specialized computer software leads from other audit files, and lifestyle audits.

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Partnering with others Federal / Provincial / Territorial Underground

Economy Working Group (FPTUEWG).• Coordinated approach

Statistics Canada.• Commissioned UE estimates • Increase knowledge about scope of UE activities

Organisation for Economic Co-operation and Development (OECD).• International partners

Canadian Home Builder’s Association.• Get it in Writing campaign

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New sanctions: ESS (Zappers)• Electronic suppression

of sales (ESS) is the use of a software application to delete or modify sales transactions from a point-of-sale (POS) system without maintaining a record of those changes.

• ESS software has been used by some businesses to hide their sales to evade the payment of GST/HST and income tax.

Use of ESS is illegal!

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New sanctions: ESS (Zappers)

New monetary penalties:For use, possession or acquisition of ESS software:

• $5,000 on the first infraction; and• $50,000 on any subsequent infraction.

For the manufacture, development, sale, possession for sale, offer for sale or otherwise making available ESS software:

• $10,000 on the first infraction; and• $100,000 on any subsequent infraction.

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New sanctions: ESS (Zappers)

New criminal offences:For use, possession, acquisition, manufacture, development, sale, possession for sale, offer for sale or otherwise making available ESS software:

• on summary conviction, a fine of not less than $10,000 and not more than $500,000 or imprisonment for a term of not more than two years, or both; or

• on conviction by indictment, a fine of not less than $50,000 and not more than $1,000,000 or imprisonment for a term of not more than five years, or both.

Specialized Audit Teams

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The Point-of-Sale (PoS) Specialized Teams enable the CRA to target the use the sales suppression software.• PoS teams are comprised of an Income Tax Auditor, a GST/HST

auditor, and an electronic commerce audit specialist.

The Underground Economy Specialized Teams (UEST) enable the CRA to target unreported income in the SME sector.• UEST focuses on the detection and assessment of unreported

income by using indirect verification of income (IVI) tests and by assessing IVI techniques.

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Newfoundland and Labrador

Nova Scotia

PEI

Nova Scotia TSO

Hamilton-Niagara TSO

Kitchener/Waterloo TSO

Ottawa TSO

Toronto North Barrie TSO

Sou thern Alberta TSO

Winnipeg TSO

Vancouver

TSO

Point-of-Sale Specialized Teams

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Refreshed audit effort focussed on:

• The use of standard audit procedures and methodologies

• Acquiring ‘real-time’ data from the taxpayer

• The use of supporting tests to validate ESS discrepancies

• The application of existing and new administrative penalties

UE Specialized Teams - IVI

Indirect verification of income (IVI) techniques may include:• Bank Deposit Analysis• Drawings Analysis• Source and Application of Funds• Rough Net Worth.

Look at the “economic entity”.

Require personal financial information at the beginning of the audit:• Taxpayer under audit• Spouse and other contributing individuals.

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Conclusion

The CRA is improving its services to help small and medium-sized businesses ‘get it right from the start’:• Range of interventions to correspond to the level of risk;

• Education and support for those who want to comply; and,

• More intensive interventions where there is a high risk of non-compliance.

This support can help taxpayers avoid stressful audits, and help the CRA keep the tax system fair for all Canadians.

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