How Bureaucratic Inertia at the CRA is Exposing You to Risk
Tax Haiku of the Week
Slow moving glaciers,
Impossible to control,
Taxpayers beware.
Introduction
Most of us are aware that in addition to glaciers simply being really old, really big ice, they are also marvels of nature that change landscapes by moving at an infinitesimally slow pace over thousands of years. Much like glaciers the CRA (or one of its various previous incarnations) has been around longer than longer than any of us, helpfully working to lessen the taxpayer’s burden of carrying a heavy wallet. Also like glaciers the CRA is not known for being quick to respond to change. And when taxpayers run afoul of the CRA, trying to deal with them is akin to trying to steer a glacier down a street.
This tendency of government employees and departments to be slow, reluctant, or outright impervious to change is known as bureaucratic inertia. What you may not know though is that bureaucratic inertia is beyond just an inconvenience, it is also responsible for exposing taxpayers to ever more risk, without you knowing it. To show you how the inertia is manifesting as risk, we are going to first explore some troubling statistics coming from the CRA. Second, we are going to review how dangerous it can be to rely on previous CRA behaviour. Third, we are going to examine some recent news stories which illustrate the problem and the added risk therein. Finally, fourth, we are going to propose how bureaucratic inertia could be conquered, thereby allowing taxpayers to steer the glacier they are forced to pilot.
Some Worrying Statistics
One of the simplest ways that bureaucratic inertia poses a risk to you is via the unknowns which result from long delays when taxpayers are reassessed or audited. In the past we have written about a 2016 report [1] from the Auditor General which hammered the CRA for being slow at, well, everything. We identified and explained that from the time that the CRA receives a taxpayer’s objection it generally takes 143 days to resolve if it is of low complexity, 431 days to resolve if it is of medium complexity, and 896 days to resolve if it is of high complexity. Assuming that taxpayers are going to live to be 82 years old, 896 days to resolve an objection for one year’s worth of taxes amounts to about 3% of taxpayers’ lives! That’s not exactly what many people would call efficient. The same Auditor General’s report indicated that just over two thirds of these objections were eventually allowed in full, or in part – meaning that the taxpayers were right all along.
While taxpayers are certainly happy when their objections are finally allowed, bureaucratic inertia at the CRA produces some real effects whilst the objection remains in limbo. Take, for example, a small Canadian based business that earns $500,000 per year selling widgets over the internet. The widgets are made in another country, and therefore the business must import them to Canada. Because of the nature of internet based businesses, some sales of widgets are international. As the business is small, it is run by one entrepreneur (let us call her Sally), with limited tax knowledge and limited legal knowledge, but Sally does the taxes and the books anyway. Sally also has a partner in the business, John, but John is a silent investor who is only interested in the odd dividend. After filing the business taxes successfully for 5 straight years, and paying a modest amount of taxes each year, the business receives a notice of reassessment covering the entire five years of the business’s existence and Sally finds the business owing an unexpected $75,000.
Because the tax burden is relatively large compared to yearly income, Sally decides to get an accountant to file a notice of objection with the CRA, which the accountant does with all due diligence. Upon receipt of the objection the CRA classifies it as being of either medium of high complexity due to the nature of the business. And now the taxpayer has to wait somewhere between 431 days and 896 days to find out whether they are one of the lucky two-thirds of objectors who have the CRA eventually reply with an “oops – our screw up – the objection is allowed” letter.
This is bad news for Sally and the widget business. They must wait between 1.2 and 2.5 years to decide if they will have $75,000 to invest in their business, or not; to hire their first employee, or not; to rent a store in a mall, or not; to start selling whatchamacallits in addition to widgets, or not. In short, the business is forced to wait at least a year until they understand what position they are in, and what its future looks like. Asking businesses and individuals to put matters on “hold” while the inert bureaucratic processes at the CRA run their course is fundamentally unfair to businesses and individuals as it leaves them in a state of unknowing for so long. They are condemned to the purgatory of tax law, uncertain of what will befall them, nor when. Eventually the bureaucratic inertia effects enough businesses to have a noticeable effect on the economy.
Reliance on the CRA’s Previous Behaviour
The second way that bureaucratic inertia poses a risk to you is via reliance on an a CRA position, which results from long delays until someone at the CRA is able to actually review your file. The above example of the widget business owner being reassessed demonstrates the precarious position which can result from bureaucratic inertia going forward from when a taxpayer is reassessed. However, the real danger of bureaucratic inertia is retrospective in nature. Let’s take the same widget seller, Sally, and assume that she resolved the $75,000 tax issue and that her objection was allowed in full after about a year (taking us to the end of the sixth year of the business). In year seven demand for widgets explode and makes fidget spinners seem like a small fad. Almost overnight the business goes from $500,000 per year to $10 million per year.
Since the widget business is one that attracts generous people who are also seeking a tax break, Sally is looking for a charity to donate some money too. Eventually she learns of Totally Legit Charity Co. (“TLCC”) and the CEO of TLCC explains to Sally that if she makes a $250,000 donation, she will get a tax receipt for $1 million. Wanting to seize the opportunity before it disappears, Sally writes a cheque on the spot, and receives a receipt. At the end of year seven, the business claims the donation on its tax return, the CRA “reviews” it, and accepts it. The widget business owners are thrilled, and so for the next four years make the same donation, receive the same receipt, and make the same claim on the tax return each year. Then in year five, the CRA catches on to what has been going on, and decides to reassess everyone who has ever made a donation to TLCC – including the widget business. Eventually the CRA finds grounds to pursue gross negligence penalties, interest, and other sanctions which the business cannot afford, and the widget dealers become insolvent.
This is the same general fact pattern that occurred in a case that was recently before the Tax Court of Canada, which we blawgged about in May of 2016 [2]. In Wynter v. HMTQ [3] Ms. Wynter fell prey to a conman and ended up making dubious investments and donations for five years before the CRA caught on to what was happening, and asked for more information. Eventually the Tax Court of Canada found Ms. Wynter guilty of gross negligence resulting in gross negligence penalties. While Ms. Wynter’s circumstances were unfortunate for a plethora of reasons, what we really care about for the purposes of this blawg is the fact that it took the CRA five years to understand what was going on. Should the CRA have had an issue with the “year one” tax return, they should have identified it and acted before year two, or at the very most, year three. But to allow taxpayers to do the same thing for five years in a row before catching onto the issue, and only then looking at all five years, is beyond unconscionable. How many years must taxpayers receive a rubber “okay” stamp from the CRA before then can reasonably assume what they are doing is allowed? It certainly is less than five.
There is a duty placed on taxpayers to know the law, and to file income tax returns in accordance with the law. But if judges can disagree on what the law is (as often happens at the Supreme Court of Canada level with split decisions), it is reasonable to assume that taxpayers and the CRA may also disagree on how to interpret and understand the law. However, if the CRA does not identify an issue with how a taxpayer has interpreted the law, at some point the taxpayer should be able to rely on their own interpretation. It is time for the case law in tax to develop a doctrine that “silence from the CRA is acquiescence” after a certain number of years in order to protect taxpayers from the potential ravages of bureaucratic inertia in cases where it can be shown that the taxpayer believed that what they were doing was allowable.
Bureaucratic Inertia at the CRA in the Media
The third way that bureaucratic inertia poses a risk to you is less direct; it is what this inertia ends up costing every Canadian taxpayer when it results in a colossal screw up. While it may be of less of a day-to-day concern to Canadians, the result is no less real: a loss of funding for programmes that, unlike the CRA, Canadians actually appreciate. Perhaps that is why the media is always willing to examine an issue where the CRA comes out looking like the Keystone Cops. Whatever the reason though, hardly a week goes by where the CRA is not in the news for some unflattering reason or another.
This week the National Post examined [4] how 11 foreign nationals were able to get $4.7 million from the CRA by filing false claims for GST and HST refunds. While the CRA was able to catch on to the scheme before the scam artists obtained their goal of $52 million, $4.7 million is not chump change. The scam worked like this: the eleven people set up 84 “corporations” (on paper anyways) in Canada and overseas with “offices” being mailboxes in the different countries. A behemoth of paperwork was generated to bolster the legitimacy of the corporations, and to make it seem like they were engaged in a multitude of transactions, generally in the electronic and telecommunication industries where the commodity being traded was an intangible product (such as an app for your phone). The 84 companies would trade the products amongst themselves, round and round, something that investigators said resembled a carousel.
The scam artists were able to keep this scheme operating, without the CRA noticing, from 2011 through to 2015, collecting over $4.7 million from the public purse and thereby depriving Canadians of this amount for other necessities such as spending on health or defence, all as a result of bureaucratic inertia. The same article notes that from 2011 through to 2016 a total of 508 individuals have been convicted for tax evasion, resulting in 244 years of jail time and $40 million in Court fines. The article is silent through on how much their activities cost the Canadian taxpayer.
The second story involving the CRA to come out this week was from the Toronto Star. “The CRA is keeping tax cheat data secret, breaking minister’s commitment” [5] was a critical expose on how the CRA has been unable to keep a promise that the Minister of National Revenue made earlier this year. The Minister stood in the House in February and made a promise to reveal how often Canada’s mindboggling 115 tax treaties and agreements have been used to obtain information on people attempting to hide money from the taxman. However, as of Sunday, the CRA has flat out refused to comply with this promise, even under Access to Information requests, and has refused to explain why they are refusing to comply.
Assuming that there has not been a coup d’etat within the Minister’s department though, there are only a select few reasons why the CRA would be refusing to comply with the Minister’s promise, all cemented in bureaucratic inertia. The first reason is that the bureaucracy may have been too slow to present the Minister with reasons why fulfilling this promise may be impossible (such as due to diplomatic understandings with other countries). The second reason why the CRA has not yet complied with the Minister’s promise could be that the CRA has not yet had time to update their own internal processes, procedures, and documents to reflect the new reality found in the Minister’s directive. The third, and most unsettling, reason for this though may be some combination of the two: there may be a legitimate reason why the CRA feels the promise is not fullfillable, and it was communicated to the Minister before her speech, however the Minister still decided that the CRA was going to be fulfilling her dictates nonetheless, and the bureaucracy is now left to try and untangle the mess and do what the Minister has mandated. Whatever the reason for the incongruence between the Minister’s promise and the CRA’s action, it obviously stems from the plague of bureaucratic inertia.
While some people may be interested in obtaining this data to figure out whether or not to risk hiding their assets off shore, there is actually also a legitimate reason for the public to want access to this information too – to determine if these 115 treaties and agreements have had the desired effect of catching tax cheats or whether they have simply fomented the hiding of money abroad, which is of particular concern following the leaking of the Panama Papers. This is information that Canadians have the right to access – and have an interest in knowing. After all, if a treaty is having the opposite of its intended effect, is it not in the interest of Canadians to end the treaty? This story demonstrates how bureaucratic inertia poses yet another risk to all taxpayers, albeit one which almost everyone is keenly aware: an inefficient government, failing to realize more potential from the tax dollars it collects.
How to Conquer Bureaucratic Inertia
There is no denying that the CRA is a bureaucratic institution: they employ over 40,000 full time staff, in addition to part time staff, term staff, and contractors. They are a veritable army of bureaucrats. However, despite being almost universally loathed by Canadians, the CRA performs an important function. While running the department has a price tag of about 2% of all revenue collected, the CRA ensures that all of the other departments and programmes have funding to function. Without a tax collector, all the niceties of a modern state such as hospitals and plumbing and banking systems would quickly fade away. However when you have a bureaucracy as inert and inefficient as the CRA, it places too much additional risk on taxpayers in general.
There is a simple solution to this problem, although it is not popular: the CRA should be appropriately funded. Instead of giving the CRA 2% of the revenue that it collects fund its operations, increase this to 2.5% or 3%, and mandate that the additional funding be used to reduce backlog, and create efficiencies. Instead of slashing the CRA’s budget, like Stephen Harper did, the CRA should be receiving a boost to ensure that it is operating in a way that allows Canadians and Canadian businesses to function effectively. No other government department is profitable – they are not designed to be. But when the CRA is the only department that brings in money for the government, should we not give them an incremental increase as required to reduce bureaucratic inertia to an acceptable level, and thereby reduce risk to all Canadians?
Conclusions
Bureaucratic inertia is a real problem at the CRA. Much like trying to steer a glacier moving at so slow a pace that the driver won’t see change in his or her lifetime, the CRA is not responsive to the needs and realities of honest taxpayers who may make legitimate mistakes in their interpretation and application of the 3,500 page Income Tax Act (and other acts and regulations). This inability to respond to the needs of taxpayers results in unfair risk being burdened by people and businesses. These risks include an unknown amount of time to resolve individual objections and issues with the CRA, reliance on the CRA’s silence which the CRA may later decide to take a position on which is to the taxpayer’s detriment, and general risks that all taxpayers face from an inert department, including the aiding and abetting of fraudsters by not responding to attacks on the system in a timely manner, and a generally poor use of tax dollars. Reducing bureaucratic inertia would not result in risk elimination, but it would provide taxpayers a reasonable level of risk and not force them to have to “steer a glacier” every time an issue comes up.
By Jonathan N. Garbutt and Barrister & Solicitor and Joshua Wasylciw, Student-at-Law.
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This Blawg is provided on a “For your information” basis only, and is not intended as, does not constitute and should not be seen as legal advice with regard to tax or family law matters.
[1] http://dominiontaxlaw.com/auditor-general-roasts-cra-else-new/
[2] http://dominiontaxlaw.com/two-recent-but-irreconcilable-cases-on-gross-negligence-penalties/
[3] Wynter v. The Queen, 2016 TCC 103