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This
Response pertains to the Seventh Report of the Standing Committee on Public
Accounts – “Chapter 4, ‘Interest on Advance Deposits from Corporate Taxpayers –
Canada Revenue Agency,’ of the Spring 2009 Report of the Auditor General of Canada.”
The
Standing Committee on Public Accounts (Committee) would like to monitor
progress and recommends:
“That the Canada Revenue Agency provide
the Public Accounts Committee with information at the end of each fiscal year
from 2009‑2010 to 2010-2011 on the amount held on deposit from
corporations at the end of the fiscal year and the amount of interest paid on
those deposits during the fiscal year.”
The Canada
Revenue Agency (CRA) agrees to provide the Committee with information at the
end of fiscal years 2009-2010 and 2010-2011 on the total amount of advance
deposits from corporations held on account as well as the amount of interest
paid on those deposits during the fiscal year.
In 2009-2010,
approximately $2.5 billion in advance deposits was held on account for
corporations by the CRA. This amount was validated under the CRA’s enhanced
administrative framework for managing these deposits. This amount is considered
reasonable as it reflects the risk of reassessment based on audit plans or as
an appeal has been filed. The approximate $2.5 billion in advance deposits
for 2009-2010 is lower than amounts reported for prior years due to the
dialogue between corporate taxpayers and
CRA employees during
the validation process that allowed for a greater understanding of the
taxpayer’s tax position and the potential for a reassessment.
In 2009-2010,
approximately $148 million in interest was paid. This amount
reflects interest paid as a result of the implementation of the enhanced
administrative framework.
With the deposits now validated, the enhanced administrative framework in place
and the proposed interest rate reduction from Budget 2010, interest costs
associated with advance deposits are expected to be lower in future years. The
Budget 2010 proposal will come into effect following Royal Assent of Bill C-9.
Details on the
amounts held on deposit and the interest paid for 2010-2011 will be provided in
2011.
The
Committee noted the proposed change in the interest rate payable to
corporations should remove any potential incentive for corporations to leave
excess advance deposits with the CRA. However, they would like to monitor
progress and recommended:
“That the Canada Revenue Agency provide
the Public Accounts Committee with its policy framework and proposed
regulations for managing advance deposits.”
The
enhanced administrative framework, outlined below, together with the Budget
2010 proposal to reduce the interest rate paid on refunds to corporations has
removed any potential incentive for corporations to keep excess advance
deposits with the CRA.
The enhanced administrative framework
requires that a specific tax year is provided for all advance deposits. Where
an advance deposit is made in respect of an anticipated
reassessment for multiple tax years, a breakdown of the individual tax years
and corresponding amounts must be provided by the taxpayer. The identification
of a tax year will allow the CRA to validate that there is a risk of
reassessment and that the amount being held on account is reasonable.
The CRA will annually review each
account to confirm the specific advance deposit(s) being held and any
reassessments that are in progress. Once the account has been reviewed, the
taxpayer will be contacted to validate the advance deposit amount(s).
The taxpayer will be provided with the
following options or a combination thereof:
- leave
the amount as an advance deposit in which case the file will be referred to
audit for validation;
- transfer
an amount to an existing debit balance on a related account;
- transfer
an amount to an unassessed year as an instalment payment;
- transfer
an amount to the taxpayer’s payroll account as a remittance payment; and/or
- receive
a refund of the advance deposit with applicable refund interest.
Should
a taxpayer refuse to provide the information or ignore repeated requests for
information, the CRA will be unable to validate that the advance deposit is
required. In this situation, one of the following actions will be taken:
- if
the taxpayer has an outstanding debt, the deposit will be applied to that debt;
- if
the taxpayer is non-compliant (e.g., has outstanding returns that have not been
filed within the prescribed legislative requirements), the advance deposit will
be transferred to the taxpayer’s instalment account to safeguard against
potential debt associated with the missing return; or
- the
advance deposit will be refunded to the taxpayer.
When
advance deposits are referred to audit for validation, the auditor’s recommendation will form the basis of the decision as to whether or
not an advance deposit is validated. The recommendation could
be that an account is currently under audit and that amount becomes a validated
deposit. Alternatively, it may be determined that the account is not under
audit and may not be audited in the future. In these situations, the audit history
will be examined to determine the risk associated with not retaining the
advance deposit. If the advance deposit is not validated, it is
refunded to the taxpayer.
Where
information is lacking, a decision will be based on historical audit data. A
conservative approach in favour of the taxpayer will be taken and the funds
will remain on account if it is unclear whether the advance deposit should be
returned or not. Should a situation ever arise where a taxpayer believes a mistake was made in
the handling of the advance deposit, the taxpayer may request that the interest
on a reassessment pertaining to a returned advance deposit be cancelled under
the Taxpayer Relief Provisions of the Income Tax Act.
The
CRA is confident that the enhanced administrative framework and the proposed
lowering of the interest rate will reduce the amount of interest paid on
advance deposits.
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